International Journal of Banking, Risk and Insurance

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Scale Efficiency and Indian Life Insurance Industry During the Post-Reform Period:An Econometric Study


Affiliations
1 Department of Commerce, Maulana Azad College, Kolkata, India
2 Department of commerce, University of North Bengal, West Bengal, India
     

   Subscribe/Renew Journal


The sine qua non of an efficient financial system is competitiveness which follows liberalisation. For the Indian insurance sector, tryst with liberalisation began two decades ago with the enactment of the Insurance Regulatory and Development Act, 1999. In view of the impact of liberalisation policy on the efficiency of the Indian life insurance sector, the present article seeks to measure scale efficiency of the individual companies and the industry as a whole during the post-reform period. In an attempt to do so, we apply Economic Frontier Approach (EFA) to estimate Transcendental Logarithmic (Translog) cost function consisting of one output and two input variables, i.e., labour and capital, for a wider time period from 2003–04 to 2015–16. Obtained results are mixed. Though the life insurance industry as a whole has huge scope of scale expansion, most of the individual firms are experiencing scale diseconomies. The present paper also succeeds in establishing a relationship between scale efficiency score and firm’s asset size. The outcome suggests a positive relationship between them.

Keywords

Life Insurance, Scale Efficiency, EFA, Translog Function.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Aigner, D. J., & Chu, S. F. (1968). On Estimating the Industry Production Function. The American Economic Review. 58(4), 826–839.

  • Aoba, N. (2006, August 6–9). Efficiency in the Japanese Life Insurance Industry: Dramatic Change. Paper presented at the Annual Meeting of American Risk and Insurance Association, Washinton, DC.

  • Banker, R. (1980). Studies in cost allocation and efficiency evaluation, PhD thesis. Graduate School of Business Administration, Harvard University

  • Banks around the world. (2017). World’s Top Insurance Companies. Retrieved from http://www.relbanks.com/top–insurance–companies/world (accessed January 22, 2018).

  • Barnett, W. A. (1980). Economic monetary aggregates an application of index number and aggregation theory. Journal of Econometrics, 14(1), 11–48.

  • Barros, C. B., Barroso, N., & Borges, M. R. (2006, May 28 – June 2). Measuring Efficiency in the Life Insurance Industry with a Stochastic Frontier Model. Paper presented at the 28th International Congress of Actuaries, Paris.

  • Berger, A. N., & Humphrey, D. B. (1992). Measurement and Efficiency Issues in Commercial Banking. In Z. Griliches (Ed.), Output Measurement in the Service Sectors (pp. 245–300). Chicago: University of Chicago Press.

  • Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98(2), 175–212.

  • Borges, M. R., Nektarios, M., & Barros, C. P. (2008). Analysing The Efficiency Of The Greek Life Insurance Industry. European Research Studies Journal, 11(3), 35–52.

  • Brockett, P. L., Cooper, W. W., Golden, L. L., Rousseau, J. J., & Wang, Y. (2005). Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies. The Journal of Risk and Insurance, 72(3), 393–412.

  • Chakraborty, J., & Sengupta, P. P. (2012). Measuring performance and efficiency growth of the selected Indian life insurance companies: A total factor productivity approach. Arth Prabhand: A Journal of Economics and Management, 1(6), 1–20.

  • Clark, J. A. (1984). Estimation of economies of scale in banking using a generalized functional form. Journal of Money, Credit and Banking, 16(1), 53–68.

  • Cummins, J. D., & Rubio–Misas, M. (2006). Deregulation, Consolidation, and Efficiency: Evidence from the Spanish Insurance Industry. Journal of Money, Credit and Banking, 38(2), 323–355.

  • Cummins, J. D., & Weiss, M. A. (1993). Measuring cost efficiency in the property-liability insurance industry. Journal of Banking & Finance, 17(2–3), 463–481.

  • Cummins, J. D., Weiss, M. A., & Zi, H. (1999). Organizational form and efficiency: The coexistence of stock and mutual property-liability insurers. Management Science, 45(9), 1254–1269.

  • Das, A., Nag, A., & Ray, S. C. (2005). Liberalisation, Ownership and efficiency in Indian banking: A nonparametric analysis. Economic and Political Weekly, 40(12), 1190–1197.

  • Dash, M., & Muthyala, A. (2018). Cost efficiency of Indian life insurance service providers using data envelopment analysis. Asian Journal of Finance & Accounting, 10(1), 59–80.

  • Dutta, A., & Sengupta, P. P. (2011). Efficiency measurement of Indian life insurance industry in post–reforms era. Global Business Review, 12(3), 415–430.

  • Ennsfellner, K. C., Lewis, D., & Anderson, R. I. (2004). Production Efficiency in the Austrian Insurance Industry: A Bayesian Examination. The Journal of Risk and Insurance, 71(1), 135–159.

  • Ertugrul, I., Oztas, G. Z., Ozcil, A., & Oztas, T. (2016). Efficiency analysis of non–life insurance companies in terms of underwriting process with data envelopement analysis.European Scientific Journal, 71–83.

  • Färe, R., Grosskopf, S., Lindgren, B., & Roos, P. (1994). Productivity Developments in Swedish Hospitals: A Malmquist Output Index Approach. In A. Charnes, W. W. Cooper, A. Y. Lewin, & L. M. Seiford (Eds.), Data Envelopment Analysis: Theory, Methodology, and Applications(pp. 253–272). Boston: Kluwer Academic Publishers.

  • Farebrother, R. W. (1980). The Durbin–Watson test for serial correlation when there is no intercept in the regression.Econometrica, 48(6), 1553–1563.

  • Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society, 120(3), 253–290.

  • Fixler, D., & Zieschang, K. D. (1991). Measuring the nominal value of financial services in the national income accounts. Economic Inquiry, 29(1), 53–68.

  • Gaurav, S., & Krishnan, J. (2017). How efficient are India’s cooperative banks? Evidence from DCCBs. Economic and Political Weekly, 52(12), 115–124.

  • Geehan, R. (1977). Returns to scale in the life insurance industry. The Bell Journal of Economics, 8(2), 497–514.

  • Gowd, T. N., Kiran, C. B., & Rao, C. R. (2012). Performance analysis of life insurance industry in India. Asian Journal of Management, 3(4), 179–187.

  • Hancock, D. (1985). The financial firm: Production with monetary and nonmonetary goods. Journal of Political Economy, 93(5), 859–880.

  • Houston, D. B., & Simon, R. M. (1970). Economies of scale in financial institutions: A study in Life Insurance. Econometrica, 38(6), 856–864.

  • Iqbal, Q., & Awan, H. M. (2015). Technical, pure technical and scale efficiency analysis of insurance companies of Pakistan. International Journal of Business and Management Review, 3(4), 82–92.

  • Jeng, V., & Lai, G. C. (2005). Ownership structure, agency costs, specialization, and efficiency: Analysis of keiretsu and independent insurers in the Japanese nonlife insurance industry. The Journal of Risk and Insurance, 72(1), 105–158.

  • Kamat, M., Ramesh, B., & Dhume, P. (2016). An application of Fixed–Effects Model (FEM) to evaluate financial performance of the indian life insurance industry. SAARJ Journal on Banking & Insurance Research, 5(5), 14–31.

  • Kamlesh. (2017). Revenue efficiency of life insurance companies of India. Aryabhatta Journal of Mathematics & Informatics, 9(1), 47–52.

  • Kaur, L. (2014). Performance Evaluation of Life Insurance Companies: A Study of Pre & Post-Reform Period. Ph. D Thesis submitted to the Faculty of Business Studies, Punjabi University, Patiala.

  • McIntosh, J. (1998). Scale efficiency in a dynamic model of canadian insurance companies. The Journal of Risk and Insurance, 65(2), 303–317.

  • Mushtaq, B., & Taqi, M. (2014). An empirical study of financial performance of Life Insurance Corporation (LIC) Of India. International Journal of Marketing & Financial Management, 2(5), 19–30.

  • Nandi, J. K. (2013). Efficiency analysis of selected public and private sector banks in India through data envelopment analysis. Vidyasagar University Journal of Commerce, 17–27.

  • Nandi, J. K. (2014). Relative efficiency analysis of selected life insurers in India using data envelopment analysis. Pacific Business Review International, 6(8).

  • Pritchett, S. T. (1971). An intercompany expense comparison for thirty life insurers. The Journal of Risk and Insurance, 38(4), 553–562.

  • Pritchett, S. T. (1973). Operating expenses of life insurers, 1961–70: Implications for economies of size. The Journal of Risk and Insurance, 40(2), 157–165.

  • Ranade, A., & Ahuja, R. (1999). Life insurance in India: Emerging issues. Economic and Political Weekly, 34(3/4), 203–205+207–212.

  • Reece, W. S. (1992). Output price indexes for the U.S. life insurance industry. The Journal of Risk and Insurance, 59(1), 104–115.

  • Sadhak, H. (2006). Life insurance and the macroeconomy: Indian experience. Economic and Political Weekly, 41(11), 1108–1112.

  • Sealey Jr., C. W., & Lindley, J. T. (1977). Inputs, outputs, and a theory of production and cost at depository financial institutions. The Journal of Finance, 32(4), 1251–1266.

  • Sensarma, R. (2005). Cost and profit efficiency of Indian banks during 1986–2003: A stochastic frontier analysis. Economic and Political Weekly, 40(12), 1198–1200+1202–1209.

  • Sinha, R. P. (2007). Premium Income of Indian Life Insurance Industry: A total factor productivity approach. The IUP Journal of Financial Economics, 5(1), 61–69.

  • Sinha, R. P., & Chatterjee, B. (2009, January 23–24). Are Indian Life Insurance Companies Cost Efficient? Paper has been presented at the 11th Money & Finance Conference, IGIDR, Mumbai, India.

  • Tone, K., & Sahoo, B. (2005). Evaluating cost efficiency and returns to scale in the life insurance corporation of India using data envelopment analysis. SocioEconomic Planning Science, 39(4), 261–285.

  • Venkateswarlu, R., & Rao, G. S. (2015). A mathematical modelling approach to efficiency ranking of indian non-life insurance firms using super-efficiency and cross-efficiency DEA Models. IOSR Journal of Mathematics, 11(1), 72–79.

  • Weiss, M. A. (1986). Analysis of productivity at the firm level: An application to life insurers. The Journal of Risk and Insurance, 53(1), 49–84.


Abstract Views: 216

PDF Views: 0




  • Scale Efficiency and Indian Life Insurance Industry During the Post-Reform Period:An Econometric Study

Abstract Views: 216  |  PDF Views: 0

Authors

Madhu Sarda
Department of Commerce, Maulana Azad College, Kolkata, India
Indrajit Ray
Department of commerce, University of North Bengal, West Bengal, India

Abstract


The sine qua non of an efficient financial system is competitiveness which follows liberalisation. For the Indian insurance sector, tryst with liberalisation began two decades ago with the enactment of the Insurance Regulatory and Development Act, 1999. In view of the impact of liberalisation policy on the efficiency of the Indian life insurance sector, the present article seeks to measure scale efficiency of the individual companies and the industry as a whole during the post-reform period. In an attempt to do so, we apply Economic Frontier Approach (EFA) to estimate Transcendental Logarithmic (Translog) cost function consisting of one output and two input variables, i.e., labour and capital, for a wider time period from 2003–04 to 2015–16. Obtained results are mixed. Though the life insurance industry as a whole has huge scope of scale expansion, most of the individual firms are experiencing scale diseconomies. The present paper also succeeds in establishing a relationship between scale efficiency score and firm’s asset size. The outcome suggests a positive relationship between them.

Keywords


Life Insurance, Scale Efficiency, EFA, Translog Function.

References