FRONTIER EFFICIENCY METHODOLOGIES TO MEASURE PERFORMANCE IN THE INSURANCE INDUSTRY: OVERVIEW AND NEW

EMPIRICAL EVIDENCE
Martin Eling, Michael Luhnen
JEL Classification: D23, G22, L11
ABSTRACT
The purpose of this paper is to provide an overview and new empirical evidence on frontier efficiency measurement in the insurance industry, a topic of great interest in the academic literature
during the last several years. In the first step, we review 83 studies and put them into a joint
evaluation of efficiency measurement in the field of insurance. In the second step, an efficiency
comparison of 3,710 insurers from 37 countries is conducted using a dataset that has not yet been
subject to efficiency analysis (the AM Best Non US database). We compare different methodologies, countries, organizational forms, distribution systems, lines of business, and company sizes.
We find a steady efficiency growth in international insurance markets from 2002 to 2006 with
large differences across countries. Furthermore, we find evidence that stock companies are more
efficient than mutuals as well as for economies of scale, but no evidence for economies of scope in
the insurance industry. Only minor variations are found when comparing different frontier efficiency methodologies (data envelopment analysis, stochastic frontier analysis) and different distribution types (agency-based vs. direct writers). Our results give valuable insight into the competitiveness of insurers in various countries.
(At the end of the paper there is an outline of further research that we would like to integrate in a
revised version of the paper to be presented at the conference on Performance Measurement in
the Financial Services Sector.)

1. INTRODUCTION
In recent years, efficiency measurement has captured a great deal of attention. The insurance sector in particular has seen rapid growth in the number of studies applying
frontier efficiency methods. Berger/Humphrey (1997) and Cummins/Weiss (2000)
surveyed eight and 21 studies, respectively; now, less than ten years after the Cummins/Weiss survey, there are 83 studies on efficiency measurement in the insurance
industry. Recent work in the field has refined methodologies, addressed new topics
(e.g., market structure and risk management), and extended geographic coverage from
a previously US-focused view to a broad set of countries around the world, including
emerging markets such as China and Taiwan.

Martin Eling is with the University of Wisconsin, School of Business, 4279 Grainger Hall, 975 University
Avenue, Madison, WI 53706, USA. Michael Luhnen is with the University of St. Gallen, Institute of Insurance
Economics, Kirchlistrasse 2, 9010 St. Gallen, Switzerland. We are grateful to Mareike Bodderas, Thomas Parnitzke, Hato Schmeiser, and Denis Toplek for valuable suggestions and comments.

The first aim of this paper is to survey these 83 studies. We provide a comprehensive
categorization of this rapidly growing body of literature and point out new developments. Frontier efficiency methodologies have been used to analyze many important
economic questions, such as comparison of countries (see, e.g., Fenn et al., 2008), organizational forms (see, e.g., Cummins/Weiss/Zi, 1998), and scale economies (see,
e.g., Fecher/Perelman/Pestieau, 1991). Other research questions have involved the efficiency effects of mergers and acquisitions (see, e.g., Cummins/Tennyson/Weiss,
1999) and the comparison of different frontier efficiency methodologies (see, e.g.,
Cummins/Zi, 1998). In our overview, we will review these fields of application, summarize the methodologies, and highlight recent developments in the field.
Existing cross-country comparisons of efficiency in the insurance industry provide
valuable insights into the competitiveness of insurers in different countries. However,
the geographic coverage of these studies is limited to certain countries or regions.
Weiss (1991b) compares the United States, Germany, France, Switzerland, and Japan;
Donni/ Fecher (1996) analyze 15 OECD countries. Both authors were restricted to using aggregated economic information instead of individual company data. Diacon/Starkey/ OBrien (2002) and Fenn et al. (2008) do use individual company data,
but concentrate on European countries (15 and 14, respectively). Rai (1996) takes a
look at nine European countries, Japan, and the United States, but considers a relatively small dataset of 106 companies. What is missing is a broad comparison of efficiency at the international level that incorporates a large number of countries and
companies.
The second aim of this paper is thus to contribute to the growing body of literature on
frontier efficiency at the international level by answering key research questions based
on a large number of countries and companies. We therefore consider a broad international dataset that has not yet been the subject of efficiency studythe AM Best Non
US database. Our cross-country analysis uses data on 3,710 insurance companies from
37 countries, which gives our studyto our knowledgethe largest sample ever analyzed for the insurance industry. We consider six main aspects: (1) methodologies, (2)
countries, (3) organizational forms, (4) distribution systems, (5) lines of business, and
(6) company size. These six aspects allow us to address many of the important economic questions set out in the first survey part of the paper. Another important contribution of this paper is that we determine and compare efficiency for a large number of
countries that have not been considered, at least to our knowledge, in the literature to
date: the Bahamas, Barbados, Bermuda, Brazil, the Czech Republic, Hong Kong,
Hungary, Indonesia, Lithuania, Mexico, Norway, Poland, Russia, Singapore, and
South Africa. Thus, the main contribution of this paper is to provide a broad evaluation

of efficiency measurement in the insurance industry with a special emphasis on an international comparison of efficiency.
Our main empirical findings can be summarized as follows:
(1) We find a steady efficiency growth in international insurance markets during the
sample period (20022006), with large efficiency differences between the 37 countries. The highest efficiency is found for Japan; the lowest for the Phillipines.
(2) We find evidence for the expense preference hypothesis (i.e., stock companies are
more efficient than mutuals) and for economies of scale (i.e., larger companies are
more efficient than smaller companies).
(3) We find only minor difference between distribution types (agency-based vs. direct
writers) and very little evidence for economies of scope (i.e., multi-line insurers are
not necessarily more efficient than mono-line insurers).
(4) We find that there is not much difference between the two frontier efficiency methodologies data envelopment analysis and stochastic frontier analysis.
The remainder of the paper is organized as follows. Section 2 contains an overview of
83 studies on efficiency measurement in the insurance industry. The empirical examination is performed in Section 3. The results of the study are summarized in Section 4.
2. OVERVIEW OF EFFICIENCY MEASUREMENT IN THE INSURANCE INDUSTRY
In this section we provide an overview of 83 studies on efficiency measurement in the
insurance industry. Our overview builds upon and significantly extends two earlier
surveys of efficiency measurement in the financial services industry: one by Berger/Humphrey (1997), which focuses on banks and provides a valuable criteria framework that we use to analyze the studies in the field of insurance, the second by Cummins/Weiss (2000), which focuses on the insurance industry and covers 21 studies that
had been published by the year 1998.
Table 1 summarizes the main features of the 83 studies. Although many of the studies
make contributions to more than one topic, in order to categorize them, we have arranged them according to their primary field of application (first column). The ten application categories were chosen and refined based on the earlier overview by Berger/Humphrey (1997). Columns 2 and 3 show the country(ies) under investigation and
the efficient frontier method used; the fourth column lists the authors and year of publication of the study. More detailed information, such as input and output factors, types
of efficiency analyzed, sample periods, lines of business covered, and main findings,
can be found in the Appendix. In the following we discuss these studies, particularly
focusing on recent developments.

Table 1: Studies on Efficiency in the Insurance Industry

Application

Country
Ukraine
Deregulation, regulation
Korea, Philippines, Taichange
wan, Thailand
Spain
Germany, UK
Germany
Germany
Austria
Germany, UK
US
Distribution systems
US
US
US
UK
UK
Financial and risk manageUS
ment, capital utilization
US
US
General level of efficiency and Portugal
productivity, evolution of
Nigeria
efficiency over time
Canada
Netherlands
US
Tunisia
Italy
US
France
US
Taiwan
Taiwan
UK
China
Germany
China
Malaysia
Greece
China
India
US
Australia
China
Intercountry comparisons
France, Belgium
6 European countries
15 European countries
15 OECD countries
Germany, UK
Austria, Germany
11 countries
Japan, France, Germany, Switzerland, US
Market structure
US
Austria
14 European countries
Mergers
US
US
US
8 European countries

Method
DEA
DEA

Author (date)
Badunenko/Grechanyuk/Talavera (2006)
Boonyasai/Grace/Skipper (2002)

DEA
DEA, DFA
DEA
DEA
DEA
DEA
DFA
DFA
DEA
DEA
SFA
SFA
DEA
SFA
DEA
DEA
DEA
Index
SFA
DEA
DFA, SFA
DEA
SFA
DEA, SFA
DFA
DFA
DFA
SFA
SFA
DEA
DEA
DEA
DEA
DEA
DEA
SFA
DEA
DEA
DEA, SFA
DEA
DEA
DEA
DEA
DEA
DFA, SFA
Index

Cummins/Rubio-Misas (2006)
Hussels/Ward (2006)
Mahlberg (2000)
Mahlberg/Url (2000)
Mahlberg/Url (2003)
Rees et al. (1999)
Ryan/Schellhorn (2000)
Berger/Cummins/Weiss (1997)
Brockett et al. (1998)
Carr/Cummins/Regan (1999)
Klumpes (2004)
Ward (2002)
Brockett et al. (2004)
Cummins et al. (2006)
Cummins/Nini (2002)
Barros/Barroso/Borges (2005)
Barros/Obijiaku (2007)
Bernstein (1999)
Bikker/van Leuvensteijn (2008)
Cummins (1999)
Chaffai/Ouertani (2002)
Cummins/Turchetti/Weiss (1996)
Cummins/Weiss (1993)
Fecher et al. (1993)
Gardner/Grace (1993)
Hao (2007)
Hao/Chou (2005)
Hardwick (1997)
Huang (2007)
Kessner/Polborn (1999)
Leverty/Lin/Zhou (2004)
Mansor/Radam (2000)
Noulas et al. (2001)
Qiu/Chen (2006)
Tone/Sahoo (2005)
Weiss (1991a)
Worthington/Hurley (2002)
Yao/Han/Feng (2007)
Delhausse/Fecher/Pestieau (1995)
Diacon (2001)
Diacon/Starkey/OBrien (2002)
Donni/Fecher (1997)
Kessner (2001a)
Mahlberg (1999)
Rai (1996)
Weiss (1991b)

SFA
SFA
SFA
DEA
DEA
DFA
DEA

Choi/Weiss (2005)
Ennsfellner/Lewis/Anderson (2004)
Fenn et al. (2008)
Cummins/Tennyson/Weiss (1999)
Cummins/Xie (2008)
Kim/Grace (1995)
Klumpes (2007)

Table 1: Studies on Efficiency in the Insurance Industry (continued)

Application
Country
Method
Author (date)
Methodology issues, compar- US
DEA, DFA, Cummins/Zi (1998)
ing different techniques or
FDH, SFA
assumptions
Spain
SFA
Fuentes/Grifell-Tatj/Perelman (2001)
Japan
DEA
Fukuyama/Weber (2001)
Taiwan
DEA
Hwang/Kao (2008)
US
Index
Weiss (1986)
Canada
DEA
Wu et al. (2007)
Canada
DEA
Yang (2006)
Organizational form, corpoUS
DEA
Brockett et al. (2005)
rate governance issues
Spain
DEA
Cummins/Rubio-Misas/Zi (2004)
US
DEA
Cummins/Weiss/Zi (1999)
Germany
DEA
Diboky/Ubl (2007)
Belgium
FDH
Donni/Hamende (1993)
US
DEA
Erhemjamts/Leverty (2007)
Japan
DEA
Fukuyama (1997)
US
SFA
Greene/Segal (2004)
UK
DEA
Hardwick/Adams/Zou (2004)
Japan
DEA
Jeng/Lai (2005)
US
DEA
Jeng/Lai/McNamara (2007)
Scale and scope economies US
SFA
Berger et al. (2000)
US
DEA
Cummins/Weiss/Zi (2003)
France
SFA
Fecher/Perelman/Pestieau (1991)
Spain
SFA
Fuentes/Grifell-Tatj/Perelman (2005)
Japan
SFA
Hirao/Inoue (2004)
Ireland
DFA
Hwang/Gao (2005)
Germany
DEA
Kessner (2001b)
US
DFA
Meador/Ryan/Schellhorn (2000)
Finland
SFA
Toivanen (1997)
US
SFA, TFA Yuengert (1993)
Abbreviations: DEA: data envelopment analysis; DFA: distribution-free approach; FDH: free-disposal hull; Index:
index numbers; SFA: stochastic frontier approach; TFA: thick frontier approach.

2.1. FRONTIER EFFICIENCY METHODOLOGIES

The two main methodologies in efficient frontier analysis are the econometric (parametric) and the mathematical programming (nonparametric) approach, which we discuss only briefly here. For a more detailed overview, the reader is referred to Banker et
al. (1989), Greene (1993), Charnes et al. (1994), Berger/Humphrey (1997), Cummins/Weiss (2000), and Cooper/Seiford/Tone (2006).
Econometric (parametric) approach
The econometric approach specifies a production, cost, revenue, or profit function with
a specific shape and makes assumptions about the distributions of the inefficiency and
error terms. There are three principal types of econometric frontier approaches. Although they all specify an efficient frontier form (usually translog but, increasingly,
alternative forms such as generalized translog, Fourier flexible, or composite cost),
they differ in their distributional assumptions of the inefficiency and random components (see Cummins/Weiss, 2000). The stochastic frontier approach (SFA) assumes a
composed error model where inefficiencies follow an asymmetric distribution (e.g.,
half-normal, exponential, or gamma) and the error term follows a symmetric distribu5

tion, usually normal. The distribution-free approach (DFA) makes fewer specific assumptions, but requires several years of data; efficiency of each company is assumed
to be stable over time, and the random noise averages out to zero. Finally, the thick
frontier approach (TFA) does not make any distributional assumptions for the random
error and inefficiency terms, but assumes that inefficiencies differ between the highest
and lowest quartile firms (see Berger/Humphrey, 1997).
Mathematical programming (nonparametric) approach
Compared with the econometric approach, the mathematical programming approach
puts significantly less structure on the specification of the efficient frontier and does
not decompose the inefficiency and error terms. The most widespread mathematical
programming approach is data envelopment analysis (DEA), which uses linear programming to measure the relationship of produced goods and services (outputs) to assigned resources (inputs). As an optimization result, DEA determines an efficiency
score, which can be interpreted as a performance measure. DEA was introduced by
Charnes/Cooper/Rhodes (1978) and builds on the method suggested by Farell (1957)
for computation of technical efficiency. DEA models can be specified under the assumption of constant (CRS) or variable returns to scale (VRS) and can be used to decompose cost efficiency into its single componentstechnical, pure technical, allocative, and scale efficiency (see Cummins/Weiss, 2000). The free-disposal hull (FDH)
approach is a special configuration of DEA. Under this approach, the points on the
lines connecting the DEA vertices are excluded from the frontier and the convexity
assumption on the efficient frontier is relaxed (see Berger/Humphrey, 1997).
Although it is not the focus of our overview, we will briefly mention total factor productivity, since many of the reviewed studies calculate this measure. The Malmquist
productivity index is the most common measure of total factor productivity. It is efficient-frontier based (mostly DEA) and able to split total factor productivity growth
into a technical efficiency and a technological change component (see Grosskopf,
1993). Another approach to total factor productivity measurement is the calculation of
index numbers (IN), which are, however, not frontier based, and have to do with the
difference between input and output growth (see Cummins/Weiss, 2000).
Both these approacheseconometric and mathematical programminghave their
supporters and there is no consensus in the field as to which method is superior (see,
e.g., Cummins/Zi, 1998; Hussels/Ward, 2006), most likely because both approaches
have their advantages and disadvantages. While the econometric approach uses strong
assumptions regarding the form of the efficient frontier, and therefore implies a certain
economic behavior, the mathematical programming approach has the advantage of
assuming less structure for the frontier; however, it does not take into account a ran6

dom error and therefore runs the risk of mistaking a true random error for inefficiency
(see Berger/Humphrey, 1997).
Looking at the overview of methods used in frontier efficiency studies as set out in
Table 1, it becomes obvious that the nonparametric DEA approach has been most frequently used: out of the 83 surveyed studies, 46 use DEA, 18 SFA, eight DFA, one
FDH, and three use index numbers. Additionally, total factor productivity using the
Malmquist productivity index has been calculated by 22 studies. For DEA, the most
widely used specification has been under the assumption of VRS. Only seven studies
follow the advice given by Cummins/Zi (1998) to consider multiple approaches, ideally from both the econometric and mathematical programming sides. However, most
of those seven studies find highly correlated results across different approaches (see,
e.g., Hussels/Ward, 2006; Fecher et al., 1993; Delhausse/Fecher/Pestieau, 1995). Often, the choice of methods is determined by the available data, e.g., if the available
data are known to be noisy, the econometric approach, featuring an error term, may
lead to more accurate results than the mathematical programming approach (see Cummins/Weiss, 2000).
In recent years, there have been a number of proposals for the improvement of efficient frontier methodology in the insurance field. For the econometric approach, a major direction has been to find more flexible specifications of the functional form, such
as the Fourier flexible distribution. This form approximates the real underlying distribution more closely than do other forms, such as the translog, and thus addresses the
main drawback of the econometric approach (see, e.g., Berger/Cummins/Weiss, 1997;
Fenn et al., 2008; Klumpes, 2004), which is the possible misspecification of the shape
of the efficient frontier due to strong distributional assumptions. A further proposal has
been made regarding the incorporation of firm-specific variables into the estimation
process. Instead of using a two-stage approach, which first estimates inefficiency of
sample firms and then examines the association of inefficiency with firm-specific variables (such as organizational form), a one-stage approach is suggested. The estimated
frontier directly takes into account firm-specific variables and allows a joint modeling
of inefficiency effects (see, e.g., Greene/Segal, 2004; Fenn et al., 2008). Another contribution has been made with regard to the Malmquist index of total factor productivity. Although this index is usually applied to nonparametric DEA for insurance companies, Fuentes/Grifell-Tatj/Perelman (2001) develop a parametric distance function
approach for the Malmquist productivity index calculation.
The mathematical programming approach has traditionally been viewed as a strictly
nonparametric approach; however, it has been shown that DEA can be interpreted as a
maximum likelihood estimator, providing a statistical base to DEA (see, e.g., Banker,
7

1993). Nevertheless, efficiency estimates are biased upward in finite examples and
therefore need to be corrected. That is why the bootstrapping procedure proposed by
Simar/Wilson (1998) has been applied to and extended for the insurance industry to
account for various kinds of efficiency (cost, technical, revenue) as well as CRS and
VRS models (see, e.g., Cummins/Weiss/Zi, 2003; Erhemjamts/Leverty, 2007;
Diboky/Ubl, 2007). A further innovation is the introduction of cross-frontier efficiency
analysis, which estimates efficiency of one particular technology relative to a best
practice frontier of an alternative technology (see Cummins/Weiss/Zi, 1999, 2003;
Cummins/Rubio-Misas/Zi, 2004). Cross-frontier analysis has been mainly used to examine the efficiency of different organizational forms. Finally, Brocket et al. (2004,
2005) apply a RAM (range-adjusted measure) version of DEA to the insurance industry, addressing theoretical problems regarding the comparison set of each firm for
which efficiency has been calculated.
2.2. INPUT AND OUTPUT FACTORS USED IN EFFICIENCY MEASUREMENT
An important decision when employing frontier efficiency models involves the choice
of inputs, outputs, and their prices, since the definition of these factors can significantly impact the results of a study (see Cummins/Weiss, 2000).
Choice of input factors
There are three main insurance inputs: labor, business service and materials, and capital. Labor can be further divided into agent and home-office labor. The category of
business service and materials is usually not further subdivided, but includes items like
travel, communications, and advertising. At least three categories of capital can be distinguished: physical, debt, and equity (see Cummins/Tennyson/Weiss, 1999; Cummins/Weiss, 2000). Since data on the number of employees or hours worked are not
publicly available for the insurance industry, to proxy labor and business service input,
input quantities are derived by dividing the expenditures for these inputs by publicly
available wage variables or price indices, e.g., the US Department of Labor data on
average weekly wages for SIC Class 6311 (home-office life insurance labor), in the
case of a US study (see Berger/Cummins/Weiss, 1997; Cummins/Zi, 1998). Physical
capital is often included in the business service and materials category, but debt and
equity capital are important inputs for which adequate cost measures have to be found
(see Cummins/Weiss, 2000). One example of how to derive equity cost is the three-tier
approach to measuring cost of equity capital based on AM Best ratings (see Cummins/Tennyson/Weiss, 1999).
There appears to be widespread agreement among researchers with regard to the
choice of inputs (see Appendix): 55 out of 83 studies use at least labor and capital as
inputs and most of them also add a third category (miscellaneous, mostly business ser8

vices). Out of those 55 studies, 15 differentiate between agent and nonagent labor.
Also, the number of studies differentiating between equity and debt capital is quite
low; only ten papers do so. Looking at the remaining 28 contributions that do not follow the standard input categories, it becomes obvious that 15 of them incorporate
broader expenditure categories as inputs (e.g., total operating expenses) without decomposing them into quantities and prices (see, e.g., Rees et al., 1999; Mahlberg/Url,
2003). There are a further nine studies that do not cover capital explicitly, i.e., they
consider labor only or labor and an additional composite category. Finally, four studies
that focus on financial intermediation consider only capital-related inputs (see, e.g.,
Brocket et al., 1998). The choice of input prices is mainly determined by the data that
are publicly available in the countries under investigation.
Choice of output factors
There are three principal approaches to measuring outputs in the financial services industry: the asset or intermediation approach, the user-cost approach, and the valueadded approach (see Berger/Humphrey, 1992). The intermediation approach views the
insurance company as a financial intermediary that manages a reservoir of assets, borrowing funds from policyholders, investing them on capital markets, and paying out
claims, taxes, and other costs (see Brocket et al., 1998). The user-cost method differentiates between inputs and outputs based on the net contribution to revenues: if a financial product yields a return that exceeds the opportunity cost of funds or if the financial
costs of a liability are less than the opportunity costs, it is deemed a financial input;
otherwise, it is considered a financial output (see Hancock, 1985; Cummins/Weiss,
2000). The value-added approach counts outputs as important if they contribute a significant added value based on operating cost allocations (see Berger et al., 2000). Usually, several types of outputs are defined, representing the single lines of business under review. In line with the theoretical literature on insurance pricing, the price of insurance outputs is calculated as the sum of premiums and investment income minus
output divided by output (see Cummins/Weiss, 2000).
The value-added approach to output measurement is clearly dominant in the insurance
industry: 69 out of 83 studies apply this approach (see Appendix). However, there is
an intense debate among those using the value-added approach as to whether
claims/benefits or premiums are the most appropriate proxy for value added (see, e.g.,
Cummins/Weiss, 2000). Out of the 69 articles, 32 specify output as either
claims/present value of claims (property-liability) or benefits/net incurred benefits
(life), following the arguments of Cummins/Weiss (2000). However, 35 studies specify output as premiums/sum insured, most likely because these measures are more
readily available for most countries. Two of the 69 studies applying the value-added
approach use neither of the two main proxies (e.g., Yuengert (1993) uses re9

serves/additions to reserves to proxy value added). There is no recognizable trend over

time as to whether either of the two main proxies is gaining more of a following
among researchers. Regarding the other two approaches for output measurement, five
studies employ the intermediation approach, e.g., taking ROI, liquid assets to liability,
and solvency scores as outputs (see Brockett et al., 2004, 2005). As argued by Cummins/Weiss (2000), this approach is not optimal because insurers provide many services in addition to financial intermediation. None of the studies reviewed uses the
user-cost approach, because this approach requires precise data on product revenues
and opportunity costs, which are not available in the insurance industry (see Klumpes,
2007). Four studies use both the value-added and intermediation approaches (see, e.g.,
Jeng/Lai, 2005). One study proposes a new relational two-stage approach to output
measurement (see Hwang/Kao, 2008): the authors construct a series relationship between the first output process (premium acquisition), providing the inputs for the second output process (profit generation). Four studies apply physical outputs, e.g., Weiss
(1986) and Bernstein (1999) use number of policies as insurance output.
2.3. FIELDS OF APPLICATION IN INSURANCE EFFICIENCY MEASUREMENT AND SELECTED RESULTS
Frontier efficiency methods have been applied to a wide range of countries (33 countries according to our survey) as well as to all major lines of business. Furthermore,
frontier efficiency methods have been used to investigate various economic issues,
including risk management (see, e.g., Cummins et al., 2006), market structure (see,
e.g., Choi/Weiss, 2005), organizational forms (see, e.g., Jeng/Lai, 2005), and mergers
(see, e.g., Cummins/Xie, 2008). However, it should be noted that findings regarding
the same economic issues often vary depending on country, line of business, time horizon, and method considered in the different studies. In the following, we analyze the
83 studies of our survey according to their field of application and selected main results. For this purpose, we consider ten application categories (see Table 1).
Deregulation and regulation change
There has been significant market deregulation of financial services in many countries
(e.g., European Union Third Generation Insurance Directive, 1994). The aim of deregulation in the financial services sector is to improve market efficiency and enhance
consumer choice through more competition. Consolidation, in particular, has the potential to improve efficiency by efficient firms taking over less efficient ones and realizing economies of scale (see Cummins/Rubio-Misas, 2006). However, the evidence
on efficiency gains due to deregulation have been mixed. Rees et al. (1999) find modest efficiency gains from deregulation for the United Kingdom and Germany for the
period from 19921994; however, Hussels/Ward (2006) do not find clear evidence for
10

a link between deregulation and efficiency for the same countries during the period
19912002. Mahlberg (2000) finds decreasing efficiency for Germany for the period
of 19921996, but an increase in productivity. For Spain, Cummins/Rubio-Misas
(2006) find clear evidence for total factor productivity growth for the period of 1989
1998, with consolidation reducing the number of firms in the market. Boonyasai/
Grace/Skipper (2002) find evidence for productivity increases in Korea and the Philippines due to deregulation. On the issue of changing regulation in the United States,
Ryan/Schellhorn (2000) find unchanged efficiency levels from the start of the 1990s to
the middle of that decade, a period during which risk-based capital requirements
(RBC) became effective.
Distribution systems
The effect of different distribution systems on the efficiency of insurance companies
has been another field of investigation but in this case the results have been more consistent. Brockett et al. (1998, 2004), studying the United States, and Klumpes (2004),
studying the United Kingdom, both find that independent agent distribution systems
are more efficient than direct systems involving company representatives or employed
agents. However, Berger/Cummins/Weiss (1997) find in their study of the United
States that agent systems are less cost efficient, but equally profit efficient, as direct
systems due to differences in service intensity that are offset by higher revenues. On a
more general level, Ward (2002), in his study of the United Kingdom, finds that insurers focusing on one distribution system are more efficient than those employing more
than one mode of distribution.
Financial and risk management, capital utilization
A relatively new field of application for frontier efficiency methods is that of financial
and risk management. Cummins et al. (2006) were the first to explicitly investigate the
relationship between risk management, financial intermediation, and economic efficiency of insurance companies. In their application to the US property-liability industry, they find that both activities significantly increase efficiency. In a similar vein,
Brockett et al. (2004) find that solvency scores used as an output have only limited
impact on efficiency scores and Cummins/Nini (2002) state that capital is used suboptimally in US property-liability insurance.
General level of efficiency and productivity, evolution of efficiency over time
This category is comprised of all those studies whose primary research objective is to
show a countrys levels of efficiency and productivity and, in most cases, also to investigate the evolution of those measures over time. Many of these studies also look at
other issues, such as scale or scope economies. Naturally, this category contains a
large number of studies that represent a first application of efficiency frontier methods
11

to countries such as Nigeria (see Barros/Obijiaku, 2007), Tunisia (see Chaffai/

Ouertani, 2002), Malaysia (see Mansor/Radam, 2000), or Australia (see Worthington/
Hurley, 2002). Given the broad range of countries and time horizons employed, findings regarding efficiency and productivity are obviously mixed; however, nearly all
studies note that there are significant levels of inefficiency in most countries with corresponding room for improvement, e.g., the Netherlands with 75% cost efficiency on
average (see Bikker/van Leuvensteijn, 2008), average efficiency of 77% (non-life) and
70% (life) in China (see Yao/Han/Feng, 2007), and average efficiency of 65% for
Greece (see Noulas et al., 2001).
Intercountry comparisons
Cross-country comparisons in the insurance industry can provide valuable insight into
the competitiveness and efficiencies of insurers in different countries. This sort of
study is especially interesting for the European market, where implementation of the
single European Union (EU) insurance license in 1994 raised concerns about international competitiveness among insurers (see Diacon/Starkey/OBrien, 2002). Consequently, there have been quite a few efficiency studies on this topic. For a sample of
450 companies from 15 European countries and for the period 19961999, Diacon/
Starkey/OBrien (2002) find striking international differences in average efficiency.
According to their study, the United Kingdom, Spain, Sweden, and Denmark have the
highest levels of technical efficiency. Additionally, in a recent study involving 14
European countries for the period 19952001, Fenn et al. (2008) find increasing returns to scale for the majority of EU insurance companies, indicating that mergers and
acquisitions, facilitated by the liberalized EU market, have led to efficiency gains.
There are also cross-country efficiency studies looking at international country samples, e.g., Weiss (1991b), covering the United States, Germany, Switzerland, France,
and Japan; Donni/Fecher (1997), comparing 15 OECD countries; and Rai (1996), analyzing 11 countries.
Market structure
Several contributions to the efficient frontier literature study the effects of deregulation
and consolidation in general (see above), but only very few explicitly analyze the relationship between market structure and performance. In a recent contribution looking at
the US property-liability market, Choi/Weiss (2005) introduce the efficiency measure
into market structure analysis. They formalize the efficient structure hypothesis, which
claims that more efficient firms charge lower prices than their competitors, allowing
them to capture larger market shares as well as economic rents, leading to increased
market concentration, and incorporate x-efficiency and scale-efficiency into their
analysis. Results suggest that regulators should be more concerned with efficiency
rather than market power arising from industry consolidation. Further contributions to
12

the topic of market structure, but with a focus on the EU, have been made by Fenn et
al. (2008) and Ennsfellner/Lewis/ Anderson (2004).
Mergers
Another relatively new field for the application of frontier efficiency methods is that of
mergers and acquisitions. The few studies that have been done aim at understanding
the motivations of merger activity from the angle of efficiency gains. An early study
by Kim/Grace (1995) simulating efficiency gains from hypothetical horizontal mergers
in the US life insurance industry indicates that most mergers would improve cost efficiencies, with the exception of mergers between large firms. Two other studies looking
at the US market are Cummins/Tennyson/Weiss (1999) for life insurance and Cummins/Xie (2008) for property-liability insurance. Both studies conclude that mergers
are beneficial for efficiency, for both the acquiring and the target firm. Also, financially vulnerable firms are found more likely to be acquired. In his application to the
European insurance market, Klumpes (2007) tests the same hypothesis as did Cummins/Tennyson/Weiss (1999) and Cummins/Xie (2008) and finds that acquiring firms
are more likely to be efficient than nonacquiring firms. However, he finds no strong
evidence that target firms achieve greater efficiency gains than nontarget firms. He
also implies that merger activity in the major European insurance markets seems to be
mainly driven by solvency objectives (i.e., financially weak insurers are bought by
financially sound companies) and less by value maximization, as found in the US.
Methodology issues, comparing different techniques or assumptions
There are a few studies whose primary objective is to solve methodological issues or
compare different techniques or assumptions over time. Among the most important of
these are Cummins/Zi (1998), comparing different frontier efficiency methods (DEA,
DFA, FDH, SFA), and Fuentes/Grifell-Tatj/Perelman (2001), introducing a parametric frontier approach for the application of the Malmquist index. For a discussion of
these and other studies having methodological issues as their primary or secondary
research objective, the reader is referred to Section 2.1 of this paper, covering different
efficiency frontier techniques, and Section 2.2, covering different ways of treating inputs and outputs.
Organizational form, corporate governance issues
A very important and well-developed field of frontier efficiency analysis deals with
the effect of organizational form on performance. The two principal hypotheses in this
area are the expense preference hypothesis (see Mester, 1991) and the managerial discretion hypotheses (see Mayers/Smith, 1988). While the expense preference hypothesis states that mutual insurers are less efficient than stock companies due to higher
perquisite consumption of mutual managers, the managerial discretion hypotheses pos13

its that the two organizational forms use different technologies and that mutual companies are more efficient in lines of business with relatively low managerial discretion
(see Cummins/Weiss, 2000). Frontier efficiency studies have confirmed these hypotheses with the general finding that stock companies are more efficient than mutual
companies in most cases (see, e.g., Cummins/Weiss/Zi (1999) and Erhemjamts/Leverty (2007) for the United States and Diboky/Ubl (2007) for Germany).
However, in some areas, mutuals have been found to be more efficient. For example,
in the study by Cummins/Rubio-Misas/Zi (2004) for Spain smaller mutuals dominate
stock companies in the production of mutual output vectors. In another study covering
Japan, Fukuyama (1997) rejects the managerial discretion hypothesis, finding that mutual and stock companies possess identical technologies. Other studies investigate efficiency improvements after demutualization (see, e.g., Jeng/Lai/McNamara, 2007) and,
looking at corporate governance issues, the relation between cost efficiency and the
size of the corporate board of directors (see Hardwick/Adams/Zou, 2004).
Scale and scope economies
Scale and scope economies are classic areas of research in frontier efficiency literature. So far, scale economies has been the more extensively researched of the two and
is particularly important in the context of consolidation and the justification of mergers
(see Cummins/Weiss, 2000). Although detailed results vary across studies, depending
on countries, methods, and time horizons employed, many contributions have found,
on average, evidence for increasing returns to scale, meaning that unit costs of production decline as firm size increases (see, e.g., Hardwick (1997) for UK, Hwang/Gao
(2005) for Ireland, Qiu/Chen (2006) for China, and Fecher/Perelman/Pestieau (1991)
for France). However, the differentiation between size clusters must be considered to
achieve more specific results. For example, Yuengert (1993), in his application to the
US life insurance market, finds increasing returns to scale for firms with up to US$15
billion in assets and constant returns to scale for bigger firms. In contrast, Cummins/Zi
(1998), for the same market, find increasing returns to scale for firms having up to
US$1 billion in assets, and decreasing returns to scale for all others except for a few
firms with constant returns to scale. The topic of scope economies is also of importance, since there is an increasing number of cross-industry mergers involving insurers
from different lines of business (see Cummins/Weiss, 2000). In general, researchers
have found evidence for the existence of economies of scope, meaning that multiproduct/-branch firms are more efficient than specialized firms (see, e.g., Meador/
Ryan/Schellhorn, 2000; Cummins/Weiss/Zi, 2003; Fuentes/Grifell-Tatj/Perelman,
2005). Again, however, looking at the study results in more detail is revealing. For
example, in Berger et al. (2000), a US application, it is shown that profit scope
economies are more likely to be realized by larger firms.
14

3. NEW EMPIRICAL EVIDENCE

As mentioned above, the geographic coverage of efficiency studies in the insurance
industry has to date been limited to certain countries or regions. The contribution of
this section is to give new insights into efficiency at the international level by analyzing a large number of countries and insurance companies. We compare different (1)
methodologies, (2) countries, (3) organizational forms, (4) distribution systems, (5)
lines of business, and (6) company sizes, which allows us to address many of the research questions surveyed in Section 2. In each case, the results are presented at different levels of aggregation, which enables us to identify the pure effect of methodologies, countries, organization, distribution, lines of business, and size on efficiency.
Additional cross-sectional insights including a Tobit regression analysis are provided
at the end of this section. In our analysis, we determine and compare efficiency for 15
countries that have not been considered in the literature to date: the Bahamas, Barbados, Bermuda, Brazil, the Czech Republic, Hong Kong, Hungary, Indonesia, Lithuania, Mexico, Norway, Poland, Russia, Singapore, and South Africa.
3.1. DATA AND METHODOLOGY
Our main data source is the 2007 edition of the AM Best Non US database (Version
2007.3). It contains information on 5,031 life and non-life insurance companies from
98 countries. The database has five years of data, covering the period 20022006.
Companies were included in our analysis if they had positive values for all the inputs
and outputs described in Table 2. This reduces our sample to 4,103 companies from 90
countries. Furthermore, in order to appropriately compare the different countries we
require each country to have at least a total of 30 firm years and to have data for each
of the five years that we analyze. This reduces our sample to 3,710 companies from 37
countries. The remaining 393 companies from 53 countries were included in the analysis as other countries.1/2
1

These countries are : Antigua and Barbuda (1 company/3 firm years), Argentina (4/15), Bahrain (4/18), Bolivia (14/37), British Virgin Islands (3/8), Bulgaria (5/14), Cayman Islands (14/57), Chile (50/144), China
(8/19), Croatia (4/12), Cyprus (5/17), the Dominican Republic (1/4), Ecuador (40/107), Egypt (6/27), El Salvador (8/17), Estonia (12/47), Greece (3/6), Guernsey (2/6), Iceland (7/21), India (12/52), the Isle of Man
(3/9), Israel (10/28), Jamaica (3/12), Jordan (2/6), Kazakhstan (1/5), Kenya (4/14), Kuwait (4/17), Latvia
(8/29), Lebanon (1/5), Macau (4/19), Malta (2/8), Monaco (1/1), Montserrat (1/2), Nigeria (2/9), the Northern
Mariana Islands (1/4), Oman (3/8), Pakistan (4/14), Panama (3/13), Peru (9/27), Qatar (3/14), Romania (3/6),
Saudi Arabia (1/5), Slovakia (10/23), Slovenia (4/15), South Korea (9/45), Tanzania (5/16), Thailand (17/45),
Trinidad and Tobago (6/27), Tunisia (2/10), the Ukraine (3/9), the United Arab Emirates (3/7), Uruguay
(12/34), and Venezuela (46/192). Unfortunately, for many South American countries (e.g., Venezuela), there
are no data available for 2006, which is why we excluded these from the country-specific analysis even though
the number of companies is relatively large. However, detailed results for all these countries are available upon
request.
We did not include Canadian insurers, which are covered in the database, but presented in a separate section
with different data fields.

15

As discussed above, there is widespread agreement in literature with regard to the

choice of inputs. We thus use labor, business services and material, debt capital, and
equity capital as inputs. Due to data availability, it was necessary to simplify this
scheme by combining labor and business services; only operating expenses (including
commissions) are available in the AM Best data. This simplification is common in
many other international comparisons (see Diacon/Starkey/OBrien, 2002; Fenn et al.,
2008) for much the same reason it is made here. Furthermore, Ennsfellner/Lewis/Anderson (2004) argue that the operating expenses should be treated as a
single input in order to reduce the number of parameters that will need to be estimated.
We thus use operating expenses to proxy both labor and business services and handle
these as a single input in the following analysis.
Cummins/Weiss (2000) showed in their analysis of operating expenses in the US insurance market that these are mostly labor related, e.g., in both life and non-life insurance, the largest expenses are employee salaries and commissions. We therefore concentrate on labor to determine the price of the operating-expenses-related input factor.
The price of labor is determined using the ILO October Inquiry, a worldwide survey
of wages and hours of work published by the International Labour Organization (ILO;
see http://laborsta.ilo.org/) and used in a variety of efficiency applications (see, e.g.,
Fenn et al., 2008). The price of debt capital is determined using country-specific oneyear treasury bill rates for each year of the sample period; the price of equity capital is
determined using the yearly rate of total return of the country-specific MSCI stock
market indices (all data were obtained from the Datastream database; see Cummins/
Rubio-Misas (2006) for a comparable selection and a discussion on selection depending on the insurers capital structure and portfolio risk). To ensure that all monetary
values are directly comparable, we deflate each years value by the consumer price
index to the base year 2002 (see Weiss, 1991b; Cummins/Zi, 1998). Country-specific
consumer price indices were obtained from the International Labour Organization.
As is usual in most studies on efficiency in the insurance industry, we use the valueadded approach to determine the outputs. We thus distinguish between the three main
services provided by insurance companiesrisk-pooling/-bearing, financial services,
and intermediation. According to Yuengert (1993), a good proxy for the amount of
risk-pooling/-bearing and financial services is the value of real incurred losses, defined
as current losses paid plus additions to reserves. As different types of services are provided by life and non-life insurance firms, we need separate output measures for each
type of firm (see Choi/Weiss, 2005). We use the present value of claims plus additions
to reserves as a proxy for the output volume for non-life insurance and the present
value of net incurred benefits plus additions to reserves for life insurance. As done, for
example, in Berger/Cummins/Weiss (1997), the price of risk-pooling/-bearing and
16

financial services is calculated as net premiums minus the volume proxy, expressed as
a ratio to the volume proxy. The output variable, which proxies the intermediation
function, is the real value of invested assets. To obtain present values we again deflate
each years value using the consumer price index. The price of the intermediation output is the expected rate of return on assets (see Berger/Cummins/Weiss, 1997); we
therefore again use the yearly rate of total return of the country-specific MSCI stock
market indices.
Panel A of Table 2 presents an overview of the inputs and outputs used in this analysis. Each input and output is calculated using a volume proxy that we obtained from
AM Best. This volume proxy is then divided by a proxy for price. Panel B of Table 2
contains summary statistics on the variables employed. All numbers were converted
into US dollars for comparative purposes using the exchange rates published in the
AM Best database.
Table 2: Inputs and Outputs
Panel A: Overview
Inputs
Labor and business service
Debt capital
Equity capital
Outputs
Non-life losses
Life benefits

Proxy for volume

AM Best operating expenses
AM Best total liabilities
AM Best capital & surplus
Proxy for volume
AM Best claims + addition to reserves

AM Best net incurred benefits + addition

to reserves
Assets
AM Best total investments
Panel B: Summary statistics for variables used
Variable
Unit
Mean
AM Best operating expenses
Million $ 220.20
AM Best total liabilities
Million $ 6473.90
AM Best capital & surplus
Million $ 517.26
AM Best losses + changes in reserves
Million $ 999.47
AM Best benefits paid + changes in reserves Million $ 2802.30
AM Best total investments
Million $ 5212.96
ILO consumer price index
%
3.78
ILO October Inquiry wages per year
%
5.11
Long-term government bonds rates
%
12.97
MSCI stock market indices returns
$
29284
(Net premium income - Proxy for non-life
$
1.32
volume) / Proxy for non-life volume
(Net premium income - Proxy for life volume) / $
0.33
Proxy for life volume
Labor and business service
Quantity 4.15
Debt capital
Quantity 1213.42
Equity capital
Quantity 299.27
Non-life losses
Quantity 306.34
Life benefits
Quantity 1194.79
Assets
Quantity 1213.42

Proxy for price

ILO October Inquiry wages per year
Long-term government bonds rates
MSCI stock market indices returns
Proxy for price
(Net premium income - Proxy for volume)
/ Proxy for volume
(Net premium income - Proxy for volume)
/ Proxy for volume
MSCI stock market indices returns
St. Dev.

Min

Max.

1174.09
44765.36
2530.88
6444.17
10974.29
27563.82
5.29
5.65
23.73
23965
17.76

0.00
0.00
0.00
0.00
0.00
0.00
-3.07
0.00
-58.07
214
-1.00

26065.20
1568570.53
82010.08
270776.30
279073.87
792591.93
44.96
57.96
101.09
120872
999.00

8.49

-1.00

499.00

32.74
10647.83
1365.88
1659.82
11053.11
10647.83

0.00
0.00
0.00
0.00
0.00
0.00

867.79
372071.22
29831.63
47414.65
393291.49
372071.22

17

In the next section, we analyze two methodologies (data envelopment analysis, stochastic frontier analysis), 37 countries (see Table 3 for listing), three organizational
forms (stocks, mutual, other), three distributional forms (agency based, direct writers,
both), three lines of business (life, non-life, groups), and three company sizes (large,
medium, small). For data envelopment analysis, we use Deap, Version 2.1 (see Coelli,
1996a) and calculate efficiency values assuming input orientation and variable returns
to scale. For stochastic frontier analysis, we calculate a translog production frontier
using Frontier, Version 4.1 (see Coelli, 1996b), assuming the inefficiencies to follow a
half-normal distribution. Company-specific information on domiciliary country, organization type, distribution type, and lines of business is extracted from the AM Best
database. Total assets is a widespread measure of insurer size (see, e.g., Cummins/Zi,
1998; Diacon/Starkey/OBrien, 2002). For comparison of different company sizes, we
thus subdivide all companies by their total assets into large (total assets larger than
$816 million), medium, and small (total assets smaller than $64 million) insurers.
3.2. RESULTS
Data envelopment analysis
The results of the data envelopment analysis are set out in Table 3, presented at different levels of aggregation so as to focus on different aspects of efficiency. The first focus is on countries (Panel A), the second on organization (Panel B), the third on distribution (Panel C), the fourth on lines of business (Panel D), and the fifth on size (Panel
E). For comparison purposes, the average values are presented in the last line of the
table. Altogether our analysis covers 4,103 insurers, with a total of 15,306 firm years.
The last line of Table 3 shows that across all 4,103 companies efficiency increased by
17.08% from 2002 to 2006. There is a steady growth in efficiency from 0.69 in 2002
to 0.75 in 2006. However, large differences can be found between countries (see Panel
A). The country with the highest efficiency is Japan (average efficiency 0.89), followed by Denmark (0.87) and Switzerland (0.83). The lowest efficiency values are
found for the Philippines (average efficiency 0.51), the Bahamas (0.57), and Ireland
(0.60). Overall, it appears that developed countries in Asia and Europe achieve higher
efficiency scores than do emerging market countries. The efficiency of the largest
economies under evaluation is in the upper-middle field: Germany is in 13th place
(average efficiency 0.77); France is in 15th place (0.76). Relatively low efficiency values were found for the United Kingdom, which is in 28th place (0.69). Considering the
development of efficiency over the sample period, the highest efficiency gains were
obtained in Sweden (+50.12%) and Turkey (+47.07%). Austria (1.76%) and the
Czech Republic (3.06%) are the only countries that did not increase efficiency from
2002 to 2006.
18

Table 3: Results of the Data Envelopment Analysis

Year

No. of
No. of firm 2002
2003
2004
2005
2006
insurers years
Panel A: Comparison of countries
Australia
107
419
0.64
0.66
0.73
0.72
0.72
Austria
48
219
0.81
0.80
0.82
0.82
0.78
Bahamas
10
43
0.54
0.50
0.56
0.61
0.68
Barbados
10
41
0.65
0.70
0.71
0.67
0.77
Belgium
108
421
0.70
0.73
0.81
0.78
0.84
Bermuda
94
333
0.69
0.72
0.73
0.74
0.76
Brazil
61
200
0.69
0.72
0.75
0.78
0.79
Czech Repub. 20
84
0.79
0.71
0.82
0.81
0.78
Denmark
181
706
0.79
0.85
0.90
0.91
0.96
Finland
62
266
0.74
0.78
0.84
0.89
0.90
France
241
923
0.71
0.74
0.77
0.78
0.81
Germany
561
2323
0.66
0.77
0.79
0.81
0.85
Hong Kong
22
84
0.66
0.72
0.75
0.70
0.83
Hungary
10
35
0.80
0.78
0.83
0.89
0.92
Indonesia
18
49
0.70
0.68
0.77
0.77
0.81
Ireland
146
481
0.51
0.61
0.66
0.65
0.58
Italy
163
651
0.75
0.76
0.80
0.80
0.83
Japan
58
282
0.84
0.86
0.90
0.94
0.93
Lithuania
28
115
0.59
0.58
0.66
0.66
0.73
Luxembourg
24
96
0.77
0.81
0.82
0.83
0.84
Malaysia
43
172
0.77
0.74
0.75
0.72
0.83
Mexico
76
225
0.70
0.65
0.73
0.66
0.73
Netherlands
289
1105
0.67
0.73
0.76
0.78
0.82
New Zealand 32
124
0.62
0.61
0.68
0.62
0.70
Norway
55
209
0.70
0.79
0.85
0.83
0.87
Other
393
1309
0.66
0.69
0.71
0.71
0.78
Philippines
20
56
0.45
0.55
0.52
0.56
0.53
Poland
19
74
0.65
0.66
0.75
0.77
0.83
Portugal
31
127
0.76
0.78
0.83
0.84
0.88
Russia
37
143
0.69
0.63
0.59
0.68
0.75
Singapore
16
58
0.71
0.75
0.78
0.73
0.80
South Africa
38
139
0.67
0.61
0.71
0.75
0.80
Spain
348
1241
0.77
0.82
0.83
0.81
0.82
Sweden
118
417
0.57
0.75
0.80
0.80
0.86
Switzerland
154
493
0.82
0.81
0.83
0.85
0.83
Taiwan
14
63
0.71
0.80
0.72
0.75
0.80
Turkey
17
54
0.51
0.66
0.69
0.80
0.75
UK
431
1526
0.65
0.69
0.70
0.69
0.74
Panel B: Comparison of organizational types
Stocks
3415
12657
0.74
0.81
0.83
0.82
0.87
Mutual
664
2585
0.77
0.84
0.61
0.67
0.70
Other
24
64
0.68
0.73
0.76
0.77
0.80
Panel C: Comparison of distributional systems
Agency based 205
850
0.71
0.72
0.75
0.74
0.77
Direct writers
80
332
0.69
0.73
0.73
0.74
0.78
Both
3818
14124
0.69
0.74
0.77
0.78
0.81
Panel D: Comparison of lines of business
Life
1212
4484
0.78
0.82
0.89
0.90
0.92
Non-life
2353
8440
0.61
0.68
0.69
0.69
0.74
Groups
538
2382
0.84
0.82
0.83
0.84
0.85
Panel E: Comparison of company size
Large
1341
5102
0.80
0.83
0.85
0.86
0.86
Medium
1603
5102
0.67
0.72
0.74
0.75
0.77
Small
1654
5102
0.62
0.69
0.72
0.71
0.77
Total
4103
15306
0.69
0.74
0.77
0.78
0.81
*: Some companies changed size during the sample period, which is why the sum of
insurers is larger than the total of 4,103 insurers.

Average

Growth 2002
to 2006 (%)

0.69
0.81
0.57
0.70
0.77
0.72
0.73
0.78
0.87
0.82
0.76
0.77
0.72
0.83
0.71
0.60
0.78
0.89
0.64
0.81
0.75
0.69
0.74
0.64
0.80
0.70
0.51
0.71
0.81
0.66
0.75
0.69
0.81
0.75
0.83
0.76
0.64
0.69

12.93
-3.06
24.65
18.28
19.22
9.59
14.03
-1.76
20.67
22.33
14.76
29.44
25.11
14.29
16.77
13.87
10.68
10.54
24.54
9.75
7.09
4.75
22.39
12.08
24.69
18.95
17.99
28.41
15.11
8.43
12.83
18.63
7.18
50.12
1.08
13.63
47.07
12.95

0.81
0.68
0.74

17.00
-8.83
17.34

0.74
0.73
0.75

7.64
12.70
17.95

0.85
0.67
0.83

16.93
21.64
1.59

0.84
7.38
0.72
13.91
0.69
23.06
0.75
17.08
large, medium, and small

19

The second focus of our analysis concerns different organizational forms and their effects on efficiency (see Panel B of Table 3). We find evidence for the expense preference hypothesis, as the average efficiency values of stock companies (0.81) are much
higher than those of mutual insurers (0.68). This finding is in line with most research
in the field, e.g., Cummins/Weiss/Zi (1999) and Erhemjamts/Leverty (2007). Other
legal forms (e.g., public companies) play only a very minor role in our sample. While
there is a steady growth in efficiency over time for stocks and other companies, we
find large variations and a decreasing efficiency for mutuals over time, an effect that
might be due to mergers, acquisitions, and demutualization occurring during the period
of investigation.
Panel C of Table 3 shows the results for different distribution systems. The DEA results do not confirm Wards (2002) finding that insurers focused on one distribution
system are more efficient than those using more than one system. Indeed, in our study,
the highest efficiency values are found for insurers using different distribution systems
(average efficiency 0.75), followed by agency based (0.74) and direct writers (0.73).
However, the differences are minor. Furthermore, note that the number of insurers that
identify as pure direct writer or agency based is relatively small in our sample (but still
large in absolute terms compared to other studies covering this aspect; e.g., Ward,
2002 covers 44 companies and Klumpes, 2004, 90 companies).
Interesting differences can be found when comparing different lines of business (see
Panel D of Table 3), a field that has not been in focus of literature to date. On a very
aggregate level (detailed results on less aggregated level are available upon request),
we compare life insurers, non-life insurers, and groups (i.e., companies offering both
life and non-life insurance). We find that average efficiency in life insurance is much
higher than in non-life insurance (0.85 vs. 0.67). This effect might be connected with
the size effects and economies of scale (see next paragraph) as, based on total assets,
the average life insurer is six times larger than the average non-life insurer. We find no
evidence for economies of scope; the multi-product/-branch firms are not more efficient than specialized firms.
In Panel E of Table 3 the total sample is subdivided by total assets into three size
groupslarge, medium, and small insurers. In agreement with most research on
economies of scale, we find that large companies have much higher efficiency than
small companies. Average efficiency for large companies is 0.84, while it is only 0.72
for medium companies, and 0.69 for small companies. However, smaller companies
have the most rapid gains in efficiency: from 2002 to 2006, efficiency increased for

20

large insurers by 7.38%, by 13.91% for medium insurers, and by 23.06% for small
insurers.
Stochastic frontier analysis
Table 4 is structured like Table 3 and shows the results of the stochastic frontier analysis. Again, average efficiency is presented for different countries (Panel A), organization types (Panel B), distribution systems (Panel C), lines of business (Panel D), and
company sizes (Panel E). The last line of the table shows the efficiency values of the
full sample. Below, we briefly highlight the main results and the main differences
compared to the DEA (Table 3).
One obvious difference between the results in Tables 3 and 4 is that the efficiency values are lower and more variable under the stochastic frontier analysis. The average
efficiency across all 4,103 companies is only 0.36 compared to 0.75 with the data envelopment analysis. Nevertheless, the results of the two types of analysis are very
similar, leading to identical economic insights. Under the SFA, efficiency increased by
30.20% from 2002 to 2006 and there is a growth in efficiency from 0.30 in 2002 to
0.38 in 2006. Large differences between countries are also found when employing stochastic frontier analysis. The country with the highest efficiency is again Japan (average efficiency 0.62) and the country with the lowest efficiency is, again, the Philippines (0.18). We again confirm the expense preference hypothesis: the average efficiency value of stock companies (0.36) is higher than that of mutual insurers (0.33).
Again, efficiency in life insurance is on average much higher than in non-life insurance (0.48 vs. 0.27). Efficiency for the multi-line groups (0.43) is lower than for the
mono-line life insurers; we thus, once more, find no evidence for economies of scope.
Finally, we find that efficiency for large companies (0.61 on average) is much higher
than for medium-sized (0.28) and small companies (0.19). All these observations confirm the results of the data envelopment analysis.
One difference between the results in Tables 4 and 3 has to do with distribution systems. The results of the SFA confirm Wards (2002) result that insurers focusing on
one distribution system have higher efficiency than those using more than one system.
Efficiency of agency-based insurers (0.51 on average) is again higher than that of direct writers (0.45), but the individual efficiency of these two groups is now much
higher than the efficiency of those insurers using both (0.35). SFA thus provides more
clear results than DEA in this case. The finding that agency-based insurers are more
efficient than direct writers is in agreement with the findings of Brockett et al. (1998,
2004) for the United States and the findings of Klumpes (2004) for the United Kingdom.
21

Table 4: Results of the Stochastic Frontier Analysis

Year

No. of
No. of firm 2002
2003
2004
2005
2006
insurers years
Panel A: Comparison of countries
Australia
107
419
0.34
0.52
0.35
0.44
0.34
Austria
48
219
0.29
0.42
0.33
0.50
0.29
Bahamas
10
43
0.16
0.40
0.14
0.23
0.30
Barbados
10
41
0.27
0.26
0.29
0.33
0.22
Belgium
108
421
0.28
0.40
0.28
0.38
0.32
Bermuda
94
333
0.32
0.35
0.37
0.45
0.30
Brazil
61
200
0.19
0.37
0.17
0.32
0.31
Czech Repub. 20
84
0.18
0.29
0.19
0.37
0.21
Denmark
181
706
0.24
0.37
0.24
0.34
0.40
Finland
62
266
0.37
0.59
0.37
0.47
0.51
France
241
923
0.42
0.54
0.43
0.51
0.56
Germany
561
2323
0.35
0.52
0.32
0.42
0.45
Hong Kong
22
84
0.21
0.21
0.17
0.29
0.19
Hungary
10
35
0.18
0.31
0.20
0.41
0.15
Indonesia
18
49
0.23
0.19
0.20
0.39
0.14
Ireland
146
481
0.27
0.40
0.25
0.35
0.28
Italy
163
651
0.39
0.55
0.42
0.51
0.49
Japan
58
282
0.56
0.73
0.54
0.66
0.60
Lithuania
28
115
0.15
0.20
0.14
0.27
0.18
Luxembourg
24
96
0.27
0.45
0.27
0.36
0.29
Malaysia
43
172
0.24
0.33
0.20
0.31
0.22
Mexico
76
225
0.18
0.33
0.17
0.26
0.34
Netherlands
289
1105
0.32
0.41
0.30
0.38
0.34
New Zealand
32
124
0.20
0.29
0.18
0.26
0.22
Norway
55
209
0.32
0.34
0.33
0.38
0.40
Other
393
1309
0.20
0.32
0.20
0.38
0.27
Philippines
20
56
0.18
0.22
0.14
0.24
0.15
Poland
19
74
0.29
0.43
0.27
0.33
0.29
Portugal
31
127
0.27
0.45
0.28
0.38
0.28
Russia
37
143
0.18
0.25
0.18
0.33
0.15
Singapore
16
58
0.24
0.20
0.20
0.32
0.24
South Africa
38
139
0.26
0.44
0.30
0.40
0.50
Spain
348
1241
0.23
0.34
0.22
0.33
0.33
Sweden
118
417
0.31
0.39
0.31
0.41
0.41
Switzerland
154
493
0.37
0.41
0.32
0.41
0.54
Taiwan
14
63
0.36
0.40
0.33
0.43
0.32
Turkey
17
54
0.19
0.25
0.22
0.33
0.22
UK
431
1526
0.27
0.49
0.34
0.45
0.39
Panel B: Comparison of organizational types
Stocks
3415
12657
0.30
0.43
0.30
0.42
0.39
Mutual
664
2585
0.29
0.40
0.27
0.36
0.38
Other
24
64
0.17
0.27
0.35
0.43
0.31
Panel C: Comparison of distributional systems
Agency based 205
850
0.48
0.54
0.48
0.56
0.49
Direct writers
80
332
0.44
0.50
0.41
0.50
0.39
Both
3818
14124
0.28
0.42
0.28
0.39
0.38
Panel D: Comparison of lines of business
Life
1212
4484
0.31
0.73
0.30
0.49
0.61
Non-life
2353
8440
0.28
0.25
0.27
0.32
0.26
Groups
538
2382
0.34
0.47
0.39
0.58
0.38
Panel E: Comparison of company size*
Large
1341
5102
0.52
0.73
0.53
0.65
0.60
Medium
1603
5102
0.24
0.37
0.22
0.31
0.23
Small
1654
5102
0.17
0.23
0.14
0.23
0.18
Total
4103
15306
0.30
0.43
0.30
0.41
0.38
*: Some companies changed size during the sample period, which is why the sum of
insurers is larger than the total of 4,103 insurers.

Average

Growth 2002
to 2006 (%)

0.40
0.37
0.24
0.27
0.33
0.36
0.26
0.25
0.31
0.46
0.48
0.41
0.21
0.26
0.22
0.31
0.47
0.62
0.19
0.33
0.27
0.24
0.35
0.23
0.35
0.26
0.18
0.33
0.34
0.22
0.24
0.36
0.28
0.36
0.38
0.37
0.23
0.39

0.15
-0.62
84.41
-21.45
12.78
-5.00
64.50
18.48
67.20
38.38
31.97
28.39
-7.85
-19.89
-40.83
4.83
25.84
6.01
17.46
9.14
-7.18
83.77
6.48
12.29
26.99
35.72
-14.53
-0.80
4.33
-17.35
-2.22
89.25
44.23
35.28
47.40
-11.79
12.14
44.40

0.36
0.33
0.34

30.58
29.79
80.14

0.51
0.45
0.35

0.82
-12.87
33.41

0.48
0.27
0.43

96.20
-5.69
11.07

0.61
14.38
0.28
-3.06
0.19
4.92
0.36
30.20
large, medium, and small

22

Further cross-sectional evidence and Tobit regression analysis

In this section we provide a cross-sectional analysis of the efficiency results presented
in Tables 3 and 4. Additional insights are provided by a Tobit regression analysis. The
groups shown in Table 5 are the result of combining the five comparison criteria from
the previous tables (countries, organization, distribution, line of business, size). We
ranked these groups according to their average efficiency score. To provide a sound
comparison, we display only the groups that have a minimum of ten firm years, resulting in a total of 261 groups.
Table 5: Results of Cross-Sectional Analysis
Rank
Country
Organization Distribution Line of business
Panel A: Based on efficiency values from data envelopment analysis
1
Japan
Mutual
Both
Life
2
Denmark
Stock
Both
Group
3
Japan
Mutual
Agency
Life
4
Denmark
Stock
Both
Life
5
Denmark
Mutual
Both
Life
6
Norway
Stock
Both
Life
7
Japan
Stock
Agency
Life
8
Brazil
Stock
Both
Life
9
Japan
Stock
Both
Non-Life
10
Spain
Mutual
Both
Group
...

261
Ireland
Stock
Agency
Non-Life
Panel B: Based on efficiency values from stochastic frontier analysis
1
Japan
Mutual
Both
Life
2
Japan
Mutual
Agency
Life
3
Netherlands Stock
Agency
Group
4
Japan
Stock
Agency
Non-Life
5
France
Stock
Agency
Group
6
Japan
Stock
Agency
Life
7
Italy
Stock
Direct
Group
8
Other
Stock
Agency
Group
9
Other
Stock
Both
Non-Life
10
Norway
Mutual
Both
Non-Life
...

261
Philippines Stock
Both
Non-Life

Size

Firm years

Efficiency

Large
Medium
Large
Large
Large
Large
Large
Large
Large
Small

Medium

15
11
20
37
86
25
14
14
38
23

12

0.99
0.98
0.97
0.97
0.97
0.97
0.97
0.97
0.96
0.96

0.32

Large
Large
Large
Large
Large
Large
Large
Large
Large
Large

Small

15
20
10
25
29
14

0.91
0.91
0.89
0.89
0.87
0.86
0.85
0.82
0.82
0.82

0.16

12
11
10

35

Panel A of Table 5 shows the results for the efficiency scores based on data envelopment analysis. The best companies are large, mutual Japanese life insurers that use
both agents and direct writers (average efficiency score 0.99). The best ten groups are
dominated by companies from Japan (4 out of the top 10), by stocks (6 of 10), by
companies using both agency based and direct writers (8 of 10), companies operating
in life insurance (7 of 10), and by large companies (8 of 10). The worst group consists
of medium-sized Irish non-life insurers, which have an efficiency of 0.32.

23

In Panel B of Table 5, the results for the efficiency scores based on stochastic frontier
analysis are presented. The best group in Panel A (large, mutual Japanese life insurers
using both agents and direct writers) is also the best group in Panel B, the second best
group with the DEA (large, mutual Japanese life insurers using agents) is in third place
with SFA. We again find mostly Japanese companies among the best ten groups (4 of
10). In contrast to the DEA, there are no Danish companies among the best 10, but,
instead, insurers from the Netherlands, France, Italy, and Norway. The worst group
with SFA are small non-life insurers from the Philippines, which have an efficiency of
0.16. In summary, it appears that the most efficient companies are large life insurers
from Japan, operating as either stock or mutuals.
Finally, we conduct a Tobit regression analysis in order to identify the key drivers of
efficiency with respect to different independent variables. As the dependent variable
(i.e., the efficiency value) is limited between zero and one, standard regression coefficients will be underestimated and thus need to be corrected. This correction is provided by Tobins (1958) modified form of a standard regression analysis for the investigation of limited dependent variables. We determine Tobit regression parameters using the statistic software R. We use the following independent, explanatory variables
for our regression on the efficiency scores (see Diacon/Starkey/OBrien (2002) for a
comparable selection): (1) organization (1 if company is stock; 0 otherwise), (2) distribution (1 if both agency based and direct writers; 0 otherwise), (3) line of business (1
if life/group; 0 if non-life), (4) company size (natural logarithm of the total assets), and
(5) squared size (to capture nonlinearities between size and efficiency). Country and
year dummy variables are included to pick up country and time effects. The Tobit regression results for the efficiency values based on data envelopment analysis are presented in Panel A of Table 6; the results based on stochastic frontier analysis in Panel
B of Table 6.
Considering Panel A, the results of the Tobit regression analysis confirm that organization and line of business are particularly and strongly associated with efficiency;
these have the (absolute) highest t-statistics and lowest p-values. Size and squared size
are also important for determining efficiency. The country dummies confirm the international differences previously identified. The results confirm the above findings that
the most efficient companies are insurers from Japan. Considering Panel B, the results
again show the importance of company size for efficiency. Surprisingly, though, and
in contrast to Panel A, organization and distribution do not significantly influence efficiency. Line of business is again positively connected with efficiency.

24

Table 6: Results of the Tobit Regression Analysis

Panel A:
Panel B:
Based on efficiency values from
Based on efficiency values from
data envelopment analysis (Adjusted R2=0.24) stochastic frontier analysis (Adjusted R2=0.24)
Coefficient St. Error
t-Statistic p-Value
Coefficient St. Error
t-Statistic p-Value
Intercept
0.86
0.03
33.61
0.00
0.79
0.04
20.65
0.00
Organization
-0.05
0.00
-13.69
0.00
0.00
0.01
0.32
0.75
Distribution
0.03
0.01
4.88
0.00
0.00
0.01
-0.22
0.83
Line of business 0.15
0.00
48.33
0.00
0.02
0.01
5.27
0.00
Size
-0.04
0.00
-10.32
0.00
-0.13
0.01
-22.27
0.00
Squared size
0.00
0.00
13.09
0.00
0.01
0.00
34.25
0.00
Australia
-0.03
0.01
-3.38
0.00
0.01
0.01
0.67
0.50
Austria
0.01
0.01
0.56
0.58
-0.08
0.02
-4.43
0.00
Bahamas
-0.15
0.03
-5.82
0.00
0.01
0.04
0.35
0.73
Barbados
0.05
0.03
1.83
0.07
0.00
0.04
0.07
0.94
Belgium
0.02
0.01
1.82
0.07
-0.03
0.01
-2.10
0.04
Bermuda
0.03
0.01
3.46
0.00
-0.01
0.02
-0.61
0.54
Brazil
0.02
0.01
1.62
0.11
0.01
0.02
0.29
0.77
Czech Repub.
0.02
0.02
1.10
0.27
-0.05
0.03
-1.91
0.06
Denmark
0.12
0.01
16.07
0.00
-0.03
0.01
-2.81
0.01
Finland
0.03
0.01
2.57
0.01
0.01
0.02
0.62
0.54
France
-0.01
0.01
-1.51
0.13
0.00
0.01
-0.10
0.92
Hong Kong
0.05
0.02
2.58
0.01
-0.06
0.03
-2.09
0.04
Hungary
0.04
0.03
1.30
0.20
-0.05
0.04
-1.23
0.22
Indonesia
0.06
0.02
2.33
0.02
-0.02
0.04
-0.60
0.55
Ireland
-0.11
0.01
-12.62
0.00
-0.02
0.01
-1.29
0.20
Italy
0.01
0.01
1.98
0.05
0.00
0.01
0.03
0.98
Japan
0.08
0.01
7.96
0.00
0.00
0.02
-0.06
0.95
Lithuania
-0.07
0.02
-4.32
0.00
-0.01
0.02
-0.26
0.80
Luxembourg
0.07
0.02
3.77
0.00
-0.04
0.03
-1.52
0.13
Malaysia
0.05
0.01
3.87
0.00
-0.05
0.02
-2.39
0.02
Mexico
-0.04
0.01
-3.54
0.00
-0.02
0.02
-1.16
0.25
Netherlands
0.01
0.01
1.84
0.07
0.00
0.01
-0.05
0.96
New Zealand
-0.04
0.02
-2.41
0.02
-0.01
0.02
-0.48
0.63
Norway
0.09
0.01
7.42
0.00
0.00
0.02
-0.27
0.79
Other
-0.15
0.02
-6.59
0.00
-0.03
0.03
-0.85
0.39
Philippines
0.00
0.02
-0.14
0.89
0.01
0.03
0.51
0.61
Poland
0.07
0.02
4.45
0.00
-0.02
0.02
-1.07
0.28
Portugal
-0.08
0.01
-5.50
0.00
-0.03
0.02
-1.17
0.24
Russia
0.07
0.02
3.08
0.00
-0.07
0.03
-2.26
0.02
Singapore
-0.04
0.02
-2.76
0.01
0.01
0.02
0.53
0.60
South Africa
0.07
0.01
12.00
0.00
-0.02
0.01
-2.29
0.02
Spain
0.01
0.01
1.38
0.17
-0.03
0.01
-2.18
0.03
Sweden
0.12
0.01
14.05
0.00
-0.01
0.01
-0.53
0.59
Switzerland
0.04
0.02
1.79
0.07
-0.05
0.03
-1.73
0.08
Taiwan
-0.05
0.02
-2.26
0.02
-0.03
0.03
-1.01
0.31
Turkey
-0.05
0.01
-9.16
0.00
-0.03
0.01
-3.93
0.00
Un. Kingdom
-0.03
0.01
-4.61
0.00
-0.01
0.01
-1.06
0.29
2006
0.07
0.01
13.36
0.00
-0.12
0.01
-15.84
0.00
2005
0.03
0.00
8.19
0.00
-0.05
0.01
-7.42
0.00
2004
0.03
0.00
7.23
0.00
-0.15
0.01
-24.99
0.00
2002
-0.04
0.00
-11.24
0.00
-0.12
0.01
-21.10
0.00
Note: The country Germany and the year 2003 were excluded from the analysis due to collinearity.

25

4. CONCLUSION
The purpose of this paper was to review recent studies on efficiency in the insurance
industry and to provide new empirical evidence on this widely discussed topic. Our
overview extends two earlier surveys, one by Berger/Humphrey (1997) and the other
by Cummins/Weiss (2000), and analyzes 83 studies on efficiency measurement in the
insurance industry. Our results show that during the last several years, methodologies
have been refined, new topics have been addressed, and geographic coverage has been
extended beyond a US focused view to a broad set of countries. The large number of
studies illustrates the increasing interest in the international competitiveness and efficiency of insurance companies.
In the second part of the paper, we extended existing cross-country comparisons of
efficiency in the insurance industry by analyzing a broad international dataset that has
not yet been the subject of an efficiency study. The cross-country analysis covers data
on 3,710 insurance companies from 37 countries, which makes our dataset, at least to
our knowledge, the largest ever analyzed in insurance-related efficiency literature. A
total of 15,306 firm years were analyzed using both data envelopment analysis (DEA)
and stochastic frontier analysis (SFA), which allows us to provide a broad range of
new insights into the efficiency of the international insurance industry:

During the sample period from 2002 to 2006, we find a steady growth in efficiency
in the international insurance markets, although there are large differences between
countries. In our cross-country comparison, Japan is the most efficient country,
while insurers from the Philippines have the lowest efficiency values.

We are the first to determine efficiency for the following 15 countries: the Bahamas
(0.57 average efficiency under DEA/0.24 average efficiency under SFA), Barbados
(0.70/0.27), Bermuda (0.72/0.36), Brazil (0.73/0.26), the Czech Republic
(0.78/0.25), Hong Kong (0.72/0.21), Hungary (0.83/0.26), Indonesia (0.71/0.22),
Lithuania (0.64/0.19), Mexico (0.69/0.24), Norway (0.80/0.35), Poland (0.71/0.33),
Russia (0.66/0.22), Singapore (0.75/0.24), and South Africa (0.69/0.36).

The results illustrate that SFA provides lower efficiency values than DEA. However, in general, the results of the two approaches and the economic insights that
can be derived from them are actually very similar. One exception to this general
similarity has to do with different distribution types (agency-based vs. direct writers): the results of the SFA are in accordance with existing literature, which shows
that agency-based insurers are more efficient than direct writers; however, no difference in efficiency based on distribution type is found with DEA.

In accordance with most other research on the topic, we find evidence for the expense preference hypothesis, which states that the average efficiency value of stock
26

companies is higher than that of mutual insurers. Again in line with most of the literature, we find that the efficiency of large insurers is higher than the efficiency of
small insurers, which is evidence for economies of scale. However, in contrast to
most other efficiency studies (see, e.g., Meador/Ryan/Schellhorn, 2000; Cummins/Weiss/Zi, 2003; Fuentes/Grifell-Tatj/Perelman, 2005), we find no evidence
for economies of scope in the international insurance industry. All results are confirmed by both DEA and SFA.

Further cross sectional analysis including a Tobit regression analysis reveal that
organization type and line of business are strongly associated with efficiency. The
most efficient insurers are large companies selling life insurance in Japan.
All these results provide valuable insights into the competitiveness of insurers in different countries. Frontier efficiency methodologies can be used to determine improvement potential for different economies by measuring industry performance relative to the best practice industries. At the individual-company level, the results can be
used to compare performance with other firms in the industry and to identify areas and
operations that need improvement. A number of implications for different managerial
decisions can be drawn, including, e.g., decisions on mergers and acquisitions, organization, and distribution.
Further research should be undertaken to validate the results presented in this first
draft of the paper. Additional frontier efficiency methodologies (e.g., the distributionfree approach presented by Meador/Ryan/Schellhorn (2000)), further cross-sectional
tests, and different types of efficiency (technical, scale, cost, revenue, and profit efficiency) might be addressed. Furthermore, in order to deepen the integration of the results with existing literature, the results should be analyzed at a more disaggregated
level, for example, the results might be broken down by different countries and compared to the results found for different countries in existing literature. Another idea
worth pursuit is to analyze the different lines of business at a more disaggregated level,
especially for the non-life insurance industry. We would be delighted to present our
paper, along with some of this further research, at the conference on Performance
Measurement in the Financial Services Sector and to contribute to a special issue of
the Journal of Banking and Finance.

27

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34

APPENDIX: OVERVIEW OF 83 STUDIES ON EFFICIENCY IN THE INSURANCE INDUSTRY

Authors

Countries

No.
Sample Lines of
insurers period business
163
2003Life, non-life
2005

Meth Input type

od
DEA Fixed assets, current assets, liabilities, equity

27

19952001

Life, non-life

DEA Wages, capital, total investment

income, premiums issued

Barros/Obijiaku (2007) Nigeria

10

20012005

Life, non-life

DEA Capital, operative costs, number of

employees, total investments

Berger et al. (2000)

684

19881992

Life, property- SFA

liability

472

19811990
19791989

Propertyliability
Life

Labor, business services, debt

capital, equity capital
Index Labor, buildings capital, machinery
capital, materials

Bikker/van Leuvensteijn Netherlands 84-105

(2008)

19952003

Life

SFA

Boonyasai/Grace/Skipper
(2002)

19781997

Life

DEA Labor, capital, materials

Brockett et al. (1998)

Korea,
49-110
Philippines,
Taiwan,
Thailand
US
1524

1989

Propertyliability

Brockett et al. (2004)

US

1524

1989

Propertyliability

Brockett et al. (2005)

US

1524

1989

Propertyliability

Carr/Cummins/Regan
(1999)

US

66

n/a

Life

13

19902000

Badunenko/
Ukraine
Grechanyuk/
Talavera (2006)
Barros/Barroso/Borges Portugal
(2005)

US

Berger/Cummins/Weiss US
(1997)
Bernstein (1999)
Canada

Chaffai/Ouertani (2002) Tunisia

12

Choi/Weiss (2005)

US

n/a

Cummins (1999)

US

750

Cummins et al. (2006)

US

1636

Labor, business services, reserves,

equity capital

DFA

Output type

Output
approach
Value
added

Main types of efficiencies analyzed

Technical, scale

Claims paid, profits

Value
added

Technical, pure
technical, scale

Profits, net premiums, settled

claims, outstanding claims,
investment income

Value
added

Technical, pure
technical, scale

Premiums

Invested assets, present value of Value

real losses incurred (p/l), incurred added
benefits (life)
Total real invested assets, real
Value
present value of expected losses added
Number of policies
Physical

Application category Selected findings

Deregulation, regulation change

Increased capitalization requirements have positively influenced Ukrainian

insurance market and helped improve both technical and scale efficiency

General level of
efficiency and productivity, evolution over
time
General level of
efficiency and productivity, evolution over
time
Scale and scope
economies

Improvement of technical efficiency over time, but deterioration in terms of

technological change

Cost, profit

Distribution systems

Independent agents less cost efficient but equally profit efficient as direct writers

Technical, scale

General level of
Average annual productivity growth of 1%
efficiency and productivity, evolution over
time
General level of
Cost inefficiency of 25% on average
efficiency and productivity, evolution over
time

Cost, revenue, profit

Most companies are VRS efficient

Conglomeration hypothesis holds for some types while strategic focus hypothesis dominates for others

Physical
Premium income, number of
outstanding policies, sum total of
insured capital, sum total of
insured annuities, unit-linked fund
policies
Premium income, net investment Value
income
added

Cost

Technical, pure
technical, scale

Deregulation, regulation change

Increasing productivity in Korea and Philippines due to deregulation and

liberalization; little effect of liberalization on productivity in Taiwan and Thailand

DEA Surplus previous year, change in

capital and surplus, underwriting and
investment expense, policyholdersupplied debt capital
DEA Surplus previous year, change in
capital and surplus, underwriting and
investment expense, policyholdersupplied debt capital
DEA Surplus previous year, change in
capital and surplus, underwriting and
investment expense, policyholdersupplied debt capital
DEA Labor (admin., agents), business
services, financial capital

ROI, liquid assets to liability,

solvency scores

Financial
intermediary

n/a

Distribution systems

Stock companies more efficient than mutuals; agency more efficient marketing
system than direct

ROI, liquid assets to liability,

solvency scores

Financial
intermediary

n/a

Financial and risk

management, capital
utilization

Solvency scores as output only with limited impact on efficiency scores

ROI, liquid assets to liability,

solvency scores

Financial
intermediary

n/a

Organizational form, Stock firms with higher inefficiency in the input dimension while mutuals with
corporate governance higher shortfalls in all areas of output; direct systems with more inefficiencies
issues
than agency

Incurred benefits, additions to

reserves

Value
added

Cost, revenue

Distribution systems

Life, non-life

DFA, Labor, physical capital, financial

SFA capital

Total premiums earned

Value
added

Technical

19921998
19881995

Propertyliability
Life

SFA Labor (agent, nonagent), materials,

equity capital
DEA Labor (admin., agents), business
services, financial capital

Present value of losses incurred,

total invested assets
Incurred benefits, additions to
reserves

Value
added
Value
added

19952003

Propertyliability

SFA

Acquisition cost, other cost (management cost, salaries, depreciation

on capital equipment, etc.)

Labor (admin., agents, risk manage- Present value of losses incurred, Value
ment), material and business service, invested assets, dollar duration of added
debt capital, equity capital
surplus

Exclusive dealing insurers less efficient than nonexclusive dealing or direct

writers; nonexclusive dealing insurers should focus on fewer product lines; firms
adopting one of Porters 3 generic strategies are more efficient than rivals
Significant potential for increase of efficiency

General level of
efficiency and productivity, evolution over
time
Cost, revenue
Market structure
Cost-efficient firms charge lower prices and earn higher profits; prices and
profits higher in revenue-efficient firms
Pure technical, scale, General level of
Efficiency scores in insurance relatively low compared to other financial serallocative, cost,
efficiency and produc- vices industries; also widely dispersed; small insurers operate with IRS; big
revenue
tivity, evolution over
insurers with DRS; brokerage system most efficient
time
Cost
Financial and risk
Risk management and financial intermediation increase efficiency
management, capital
utilization

Cummins/Nini (2002)

US

770

19931998

Propertyliability

Cummins/Rubio-Misas Spain
(2006)

508

19891998

Life, non-life

Cummins/RubioMisas/Zi (2004)

Spain

347

19891997

Life, non-life

DEA Labor, business services, debt

capital, equity capital

Cummins/Tennyson/Weiss
(1999)

US

750

19891995

Life

DEA Home-office labor, agent labor,

Incurred benefits, additions to
business services (including physical reserves
capital), financial capital

Cummins/Turchetti/Weiss
(1996)

Italy

94

19851993

Life, non-life

DEA Labor (acquisition, admin.), fixed

capital, equity capital.

Cummins/Weiss (1993) US

270

19801988

Propertyliability

Cummins/Weiss/Zi
(1999)

US

417

19811990

Propertyliability

Cummins/Weiss/Zi
(2003)

US

817

19931997

DEA Labor (office, agent), materials and

business service, financial equity
capital

Technical, cost,
revenue

US

1550

19942003

Health/life/accident: Incurred
benefits plus changes in reserves;
Non-life: Losses incurred, real
invested assets
DEA Labor (admin., agent), materials and Present value of losses incurred,
business services, financial equity
real invested assets
capital

Value
added

Cummins/Xie (2008)

Life incl.
health; property-liability,
diversified
firms
Propertyliability

Value
added

Cummins/Zi (1998)

US

445

19881992

Life

Benefit payments, additions to

reserves

Value
added

DelBelgium,
434
hausse/Fecher/Pestieau France
(1995)
Diacon (2001)
6 European 431
countries

19841988

Non-life

Premiums

Value
added

Technical, scale

1999

General
insurance

Technical

19961999

Diboky/Ubl (2007)

90

20022005

Life incl.
pension, and
health
Life

Net earned premiums (general,

long-term), total investment
income
Net earned premiums (general,
long-term), total investment
income
Gross premium, net income

Value
added

Diacon/Starkey/OBrien 15 European 454

(2002)
countries

DEA, Labor, financial capital, materials

DFA,
FDH,
SFA
DEA, Labor costs, other outlays (capital
SFA consumption, purchase of equipment
and supplies, etc.)
DEA Total operating expenses, total
capital, total technical reserves, total
borrowings from creditors
DEA Total operating expenses, total
capital, total technical reserves, total
borrowings from creditors
DEA Labor, business services, financial
debt capital, equity capital

Cost, technical,
allocative, pure
technical, scale,
revenue
Cost, technical,
allocative

n/a

19831991
19821988

Germany

Donni/Fecher (1997)

15 OECD
countries
Donni/Hamende (1993) Belgium

Ennsfellner/Lewis/Anderson
(2004)

Austria

300

97

19941999

DEA Labor (office, sales), materials and

business service, financial equity
capital
DEA Labor, business services, debt
capital, equity capital

Present value of losses incurred, Value

total invested assets
added

Technical, allocative,
cost, revenue

Non-life losses incurred, life

Value
losses incurred, reinsurance
added
reserves, nonreinsurance
reserves, invested assets
Life and non-life insurance losses Value
incurred
added

Cost, pure technical,

allocative, scale

Value
added

Life insurance: sum of life

Value
insurance benefits, changes in
added
reserves, invested assets
Non-life insurance: Losses
incurred, invested assets
SFA Labor, capital, intermediate materials Discounted incurred losses, loss Value
added
reserves, loss adjustment
expense reserve, unearned
premium reserve, loss adjustment
expenses paid
DEA Labor, business services, debt
Real additions to reserves, real Value
capital, equity capital
incurred benefits
added

Life, non-life

DEA Labor

Net premiums

Life, non-life

FDH Labor cost, other cost

Premiums; alternatively, losses

incurred

Life, health,
non-life

SFA

Health/life: Incurred benefits,

changes in reserves, total
invested assets
Non-life: Claims incurred, total
invested assets

Net operating expenses, equity

capital, technical provisions

Technical, allocative,
cost, revenue

Cost, technical,
allocative, pure
technical, scale,
revenue
Technical

Financial and risk

management, capital
utilization
Deregulation, regulation change

On weighted industry average, firms could reduce labor by 62%, materials by

36%, and capital by 46%; capital is used suboptimally
Consolidation leads to growth in TFP and increases number of firms operating
with decreasing returns to scale

Organizational form, In cost and revenue efficiency, stocks of all sizes dominate mutuals in the
corporate governance production of stock output vectors, and smaller mutuals dominate stocks in the
issues
production of mutual output vectors; larger mutuals are neither dominated by
nor dominant over stocks
Mergers
M&A beneficial for efficiency; target life insurers achieve greater efficiency gains
than firms that have not been involved in M&As

General level of
Stable efficiency over time (7078 for the industry) with sharp decline (25%
efficiency and produc- cumulative) in productivity due to technological regress
tivity, evolution over
time

Cost

General level of
Large insurers at 90% relative to their cost frontier; medium and small insurers
efficiency and produc- at 80% and 88%, respectively; scale economies with small and medium-sized
tivity, evolution over
insurers
time

Technical, cost

Organizational form, Stock cost frontier dominates mutual cost frontier

corporate governance
issues
Scale and scope
Weak evidence for existence of economies of scope
economies

Mergers

M&As in property-liability insurance are value enhancing; acquiring firms

achieved more revenue efficiency gains than nonacquiring firms, and target
firms experienced greater cost and allocative efficiency growth than nontargets

Methodology issues,
comparing different
techniques or assumptions
Intercountry comparisons

Choice of estimation method can have a significant effect on the conclusions of

an efficiency study; efficiency rankings are well preserved among the econometric methods; but the rankings are less consistent between the econometric
and mathematical programming methods
French companies on average more efficient than Belgian ones; overall low
efficiency levels; high correlation between results of both approaches

Intercountry comparisons

Average efficiencies: UK (77%), France (67%), Germany (70%), Italy (56%),

Netherlands (69%), Switzerland (66%)

Value
added

Pure technical, scale, Intercountry comparimix

sons

Striking international differences and decreasing levels of average technical

efficiency over sample period

Value
added

Technical, cost and

allocative efficiency

Stock ownership is superior to mutual and public structure

Value
added
Value
added

Technical

Value
added

Technical

Technical

Organizational form,
corporate governance
issues
Intercountry comparisons
Organizational form,
corporate governance
issues
Market structure

Average efficiency levels rather high and dispersed; growth in productivity

observed in all countries and due to improvements in technical progress
Superior efficiency of nonprofit insurance companies

Deregulation had positive effects on production efficiency

36

Erhemjamts/Leverty
(2007)

US

697

19952004

Life

DEA Labor, business services, equity

capital, policyholder-supplied debt
capital
DEA, Labor cost, other outlays
SFA

Incurred benefits, additions to

reserves

Value
added

Technical

Fecher et al. (1993)

France

327

19841989

Life, non-life

Gross premiums

Value
added

Technical, cost

Fecher/Perelman/Pestie France
327
au (1991)
Fenn et al. (2008)
14 European n/a
countries

19841989
19952001

Life, non-life

SFA

Labor cost, other outlays

Gross premiums

Cost

SFA

Capital, technical provisions, labor,

debt capital

Value
added
Value
added

Life, non-life,
composite

Cost

Health, life,
non-life

SFA

Labor costs, composite input

Net incurred claims (= gross

claims paid claims received
from reinsurers + increase in loss
reserves + bonuses and rebates)
Annual premiums
Value
added

Fuentes/GrifellTatj/Perelman (2001)

Spain

55-70

19871994

Fuentes/GrifellTatj/Perelman (2005)

Spain

n/a

19871997

Health, life,
propertyliability
Life

SFA

Labor costs, composite input

Annual premiums

Value
added

Technical

Fukuyama (1997)

Japan

25

19881993

DEA Labor (office, sales), capital

Insurance reserves, loans

Technical, scale

19831994

Non-life

DEA Labor, capital

Reserves, loans, investments

Financial
intermediary
Financial
intermediary

Fukuyama/Weber
(2001)

Japan

17

Gardner/Grace (1993)

US

561

19851990

Life

DFA

Labor, physical capital, misc. items

Premiums, securities investments Value

added

Greene/Segal (2004)

US

136

19951998

Life

SFA

Labor, capital, materials

Premiums, investments

Value
added

Hao (2007)

Taiwan

26

19812003

Life

DFA

Labor, physical capital, claims

Premiums, investments

Value
added

Hao/Chou (2005)

Taiwan

26

19771999

Life

DFA

Labor, physical capital, claims

Premiums, investments

Value
added

Hardwick (1997)

UK

54

19891993

Life incl.
pension, and
health

SFA

Labor, capital

Premiums

Value
added

Hardwick/Adams/Zou
(2004)

UK

50

19942001

Life

DEA Labor, capital

Incurred benefits, additions to

reserves

Value
added

Hirao/Inoue (2004)

Japan

33

19801995

Propertyliability

SFA

Value
added

Huang (2007)

China

n/a

19992004

Life, property- SFA

liability

Real incurred losses (net claims

paid and changes in loss reserves)
Premiums earned, incurred
benefits and additions to reserves, total invested assets

Hussels/Ward (2006)

Germany
and UK

47 (UK)
31 (GE)

19912002

Life

DEA, Labor, capital

DFA

Hwang/Gao (2005)

Ireland

11

19912000

Life

DFA

Labor, agencies, materials

Labor, capital, business services

Labor (admin., agent), financial

capital

Technical

Organizational form,
corporate governance
issues
General level of
efficiency and productivity, evolution over
time
Scale and scope
economies
Market structure

Stock production technology dominates mutual technology; mutuals that are

further away from mutual efficient frontier more likely to demutualization; access
to capital important reason for demutualization
High correlation between parametric and nonparametric results; wide dispersion
in the rates of inefficiency across companies

Methodology issues,
comparing different
techniques or assumptions
Scale and scope
economies

Malmquist index of productivity growth can also be estimated on basis of

parametric frontier approach

Increasing returns to scale

Most European insurers operating under IRS; size and domestic market share
lead to higher levels of cost inefficiency

Overall low productivity growth over time (less than 2% per year), multi-branch
companies perform better than specialized firms

Organizational form,
corporate governance
issues
Technical
Methodology issues,
comparing different
techniques or assumptions
Cost
General level of
efficiency and productivity, evolution over
time
Cost
Organizational form,
corporate governance
issues
Cost
General level of
efficiency and productivity, evolution over
time
Cost
General level of
efficiency and productivity, evolution over
time
Economic, scale, total General level of
inefficiency
efficiency and productivity, evolution over
time
Cost, technical,
Organizational form,
allocative
corporate governance
issues
Cost, scale
Scale and scope
economies

Mutual and stock companies possess identical technologies; productive

efficiency and productivity performances differ across 2 ownership types and
different economic conditions
Productivity and technological progess over time in Japan

Value
added

Cost, profit

Non-state-owned companies and foreign companies are superior in terms of

cost efficiency to the property insurance industry, state-owned companies, and
domestic companies

Net written premiums, additions

to reserves

Value
added

Cost, technical,
allocative, scale

Insurance benefits, investable

funds

Value
added

Cost

General level of
efficiency and productivity, evolution over
time
Deregulation, regulation change
Scale and scope
economies

Persistent inefficiency

Inefficiency negatively associated with profitability; stock companies as efficient

and profitable as mutual companies
Firms with large market share tend to be cost efficient

Firms with larger market share are more profitable; product diversification does
not improve efficiency

High level of inefficiency; increasing returns to scale

Cost efficiency positively related to size of corporate board of directors

Statistically significant economies of scale and scope

Comparability of results from DEA and DFA; UK efficiency frontier less efficient
than German frontier; no clear evidence for link between deregulation and
efficiency levels
Increasing returns to scale; magnitude of cost economies varies with firm size

37

Hwang/Kao (2008)

Taiwan

24

20012002

Non-life

DEA Operation expenses, insurance

expenses

Jeng/Lai (2005)

Japan

21

19831994

Non-life

DEA VA: Labor, business services, capital

(debt + equity)
FI: ROA, financial condition of insurer
(proxied)

Jeng/Lai/McNamara
(2007)

US

11

19801995

Life

Kessner (2001a)

Germany
and UK

87 (UK)
78 (GE)

19941999

Life

Kessner (2001b)

Germany

75

19891994

Life

Kessner/Polborn (1999) Germany

110

19901993

Life

DEA VA: Labor, business services, equity

capital
FI: ROA, financial condition of insurer
(proxied)
DEA New business cost, administration
cost, cost for capital management,
reinsurance contributions
DEA New business cost, administration
cost, cost for capital management,
reinsurance contributions
DEA New business cost, administration
cost

Kim/Grace (1995)

US

248

19881992

Life

DFA

Klumpes (2004)

UK

40

Life

SFA

Klumpes (2007)

8 EU
countries

1183

19941999
19972001

Life, general
insurance

19952002

Life, property- DEA Business expenses, financial equity

casualty
capital, debt capital

Value
added

Value
added

Leverty/Lin/Zhou (2004) China

20-41

Austria and n/a

Germany

19921996

Life, health,
propertyliability

DEA

Mahlberg (2000)

Germany

348

19921996

Life, health,
propertyliability

DEA

Mahlberg/Url (2000)

Germany

464-533 19921996

DEA

Mahlberg/Url (2003)

Austria

70

19921999

Life, health,
propertyliability
Life, health,
propertyliability

Mansor/Radam (2000) Malaysia

12

19871997

Life

DEA

Meador/Ryan/
Schellhorn (2000)
Noulas et al. (2001)

US

358

Life

DFA

Greece

16

19901995
19911996

DEA

Methodology issues, New relational model is more reliable in measuring efficiencies than independcomparing different
ent models
techniques or assumptions

Value
Technical, cost
added/finan
cial intermediation

Organizational form, Keiretsu firms more cost efficient than NSIFs; otherwise not possible to reject
corporate governance null hypothesis that all equally efficient; deteriorating efficiency for all company
issues
types; FI and VA approaches with different, but complementary, results

Value
Cost, technical,
added/finan allocative
cial intermediation
Value
Technical
added

Organizational form, For both approaches, no efficiency improvement after demutualization; excepcorporate governance tion: improvement for mutual control insurers under FI approach
issues
Intercountry comparisons

British insurers more efficient than German insurers; increasing efficiency in

both markets
Small companies with increasing returns to scale; big companies with decreasing returns to scale

Value
added

Technical, scale

Scale and scope

economies

Value
added

Technical

Claims, changes in reserves,

investment expenses

Value
added

Cost

Value
added
Value
added

Cost, profit

General level of
High level of inefficiency
efficiency and productivity, evolution over
time
Mergers
Smaller firms with larger cost savings from mergers than large firms; no cost
savings in mergers of mutuals; mergers of efficient with less efficient companies
increase combined firm efficiency
Distribution systems
IFA-based firms less cost and profit efficient than AR/CR firms

Life: Net premiums written, real

invested assets
P&C: Losses incurred, real
invested assets
Administration and distribution cost (1 P&L: Claims, change in reserves,
input)
refund of premium
Life, health, accident: Claims,
change in reserves, refund of
premium
Administration and distribution cost (1 P&L: Claims, change in reserves
input)
Life, health, accident: Claims,
change in reserves (DeckRST),
refund of premium
Expenditures on labor, material,
Claims, net change in provisions,
energy, depreciation, marketing,
allocated investment returns,
commissions (1 input)
bonuses and returned premia
Expenditures on labor, material,
Claims, net change in provisions,
energy, depreciation, marketing,
allocated investment returns,
commissions (1 input); capital mgt.
bonuses and returned premia
cost (1 input)
Claims, commission, salaries,
New policy issued, premium,
expenses, other cost
policy in force

Labor, physical capital, misc. items

New 2n/a
stage
production
process

Sum insured (new and existing

business), net returns on capital
investments
Sum insured of new and in-force
business

Labor (home office, agent), business Claims, real invested assets

services, financial capital
DEA Labor, business services, debt
Premiums, investment income
capital, equity capital

Mahlberg (1999)

Non-life

Labor (agent, nonagent), capital,

materials

Intermediate products: direct

written premiums, reinsurance
premiums;
Final outputs: underwriting profit,
investment profit
VA: Number of policies, total
invested assets
FI: Equity capital, underwriting
and investment expenses, debt
capital supplied by policyholders
VA: Benefits
FI: Equity capital, underwriting
and investment expenses, debt
capital supplied by policyholders
Gross and net written premiums,
interest on capital

Cost, technical,
Mergers
allocative, pure
technical, scale,
revenue
Technical, scale, pure General level of
technical
efficiency and productivity, evolution over
time
Technical
Intercountry comparisons

Acquiring firms achieve greater efficiency gains than either target firms or firms
not involved in mergers; no beneficial effect of mergers on target firms; M&A
driven mostly by solvency objectives

Value
added

Technical

Deregulation, regulation change

Decreasing efficiency; increasing productivity

Value
added

Technical

Deregulation, regulation change

Still cost-saving potential; increasing divergence between fully efficient firms

and efficiency laggards; low cost-savings potential from further mergers

Value
added

Technical

Deregulation, regulation change

Still considerable inefficiency; increased productivity

Value
added

Technical

General level of
Productivity growth; but low compared to real growth of economy
efficiency and productivity, evolution over
time
Scale and scope
Multi-product firms more efficient than focused firms
economies
General level of
Industry highly inefficient, with notable differences between different companies
efficiency and productivity, evolution over
time

Premiums, securities investments Value

added
DEA Salaries and expenses (1 input) and Premium income, revenue from Value
payment to insurers and expenses
investment activities
added
incurred in the production of services
(1 input)

Cost
Technical

Productivity growth; in P&C due to presence of technically efficient foreign firms

Inefficiencies in both markets; Austrian insurers more efficient than German

insurers

38

Qiu/Chen (2006)

China

Rai (1996)

11 countries 106
internationally
Germany
n/a
and UK

Rees et al. (1999)

14-32

20002003

Life

19881992

DEA Labor, equity capital, other

Benefit payments, additions to

reserve, yield of investment

Value
added

Technical, pure
technical, scale

Life incl.health, DFA, Labor, capital, benefits and claims

non-life
SFA

Premiums (life and non-life)

Value
added

Cost

19921994

Life

19901995
19891991
19822001

Life

DFA

Labor, financial capital, materials

Non-life

SFA

Labor

Total premium income and

Value
change in total premium income added
(UK), aggregate sum insured and
change in aggregate sum insured
(GE)
Benefit payments, additions to
Value
reserves
added
Number of units produced
Physical

Life

DEA Labor, business services, debt

capital, equity capital

Present value of real losses

Value
incurred, ratio of liquid assets to added
liabilities

Technical, allocative,
cost, scale

19901997
19761980

Life

SFA

Claims, additions to reserves

Cost, revenue, profit

Life

Index Labor (supervisor, agent, other);

materials; capital (home office, field)

DEA Distribution cost, administration cost

Ryan/Schellhorn (2000) US

321

Toivanen (1997)

Finland

21

Tone/Sahoo (2005)

India

Ward (2002)

UK

44

Weiss (1986)

US

Weiss (1991a)

US

100

19801984

Propertyliability

SFA

Weiss (1991b)

CH, F, GE, n/a

J, US
Australia
46

19751987
1998

Propertyliability
General
insurance

Index

Wu et al. (2007)

Canada

71-78

19961998

Life incl. health DEA

Yang (2006)

Canada

72

1998

Life incl. health DEA

Yao/Han/Feng (2007)

China

22

19992004

Life, non-life

Yuengert (1993)

US

765

1989

Worthington/Hurley
(2002)

DEA

DEA

Labor, capital

Number of policies, constant

dollar insurance in force, real
premium

Value
added
Physical

Technical

Cost
Cost

General level of
Average technical efficiency declining over time; increasing returns to scale
efficiency and productivity, evolution over
time
Intercountry compari- Firms in Finland and France with lowest inefficiency; firms in UK with highest;
sons
small firms more cost efficient than large firms; specialized firms more cost
efficient than combined firms
Deregulation, regula- Looser regulation and increased competition increase efficiency
tion change

Deregulation, regulation change

Scale and scope
economies
General level of
efficiency and productivity, evolution over
time
Distribution systems

n/a

Methodology issues,
comparing different
techniques or assumptions
Labor (agent, supervisory, nonsuper- Incurred losses, reserves
Value
Technical, allocative, General level of
visory), material, capital
added
scale
efficiency and productivity, evolution over
time
Labor, capital
Incurred losses, reserves
Value
n/a
Intercountry compariadded
sons
Labor, information technology,
Net premium revenues, invested Value
Pure technical, scale, General level of
physical capital, financial capital
assets
added
allocative, cost
efficiency and productivity, evolution over
time
Prod: Labor expenses, general
Prod: Net premiums written, net Value
Systematic, technical Methodology issues,
operating expenses, capital equity,
income
added/finan (production), investcomparing different
claims incurred
Inv: Investment gains in bonds
cial interment
techniques or assumpInv: Net actuarial reserves, investand mortgages, investment gains mediation
tions
ment expenses, total investments,
in equities and real estate
total segregated funds
Prod: Labor expenses, general
Prod: Net premiums written, net Value
Systematic, technical Methodology issues,
operating expenses, capital equity,
income
added/finan (production), investcomparing different
claims incurred
Inv: Investment gains in bonds
cial interment
techniques or assumpInv: Net actuarial reserves, investand mortgages, investment gains mediation
tions
ment expenses, total investments,
in equities and real estate
total segregated funds
Labor, capital, payment and benefits Premiums, investment income
Value
Technical
General level of
added
efficiency and productivity, evolution over
time
Labor, physical capital
Reserves, additions to reserves Value
Cost, scale
Scale and scope
added
economies

Life incl.
SFA,
accident and TFA
health
Abbreviations: DEA: data envelopment analysis; DFA: distribution-free approach; FDH: free-disposal hull; Index: index numbers; SFA: stochastic frontier approach; TFA: thick frontier approach.

Unchanged efficiency levels after RBC became effective

Diseconomies of scale at firm and economies of scale at branch level; economies of scope in production
Increasing allocative inefficiencies after 1994; increase in cost efficiency in 2000

Cost benefits for firms focusing on one mode of distribution

Theoretically sound method for measuring productivity in life insurance industry
has been introduced

Estimated inefficiency costs of 1233% of premiums

Japan with weakest productivity growth; US and Germany with overall high
productivity
Low average level of efficiency; mostly due to allocative inefficiency

New model allows integration of production performance and investment

performance; Canadian companies operated very efficiently

New model allows integration of production performance and investment

performance; Canadian companies operated fairly efficiently

Average efficiency of 0.77 for non-life and 0.70 for life companies

Economies of scale, but not for whole sample; x-inefficiency 3550%

39