Cost efficiency and value driver analysis of insurers in an emerging economy

Abstract

This study investigated cost inefficiencies and its relationship with value drivers of insurers in United Arab Emirates (UAE). The study revealed that there were 21-33% cost inefficiencies in these insurers under different model specifications of stochastic frontier and DEA; value drivers such as lower leverage risk, lower capital risk significantly improved cost efficiencies consistent with Basel II norms; ROE positively influenced cost efficiencies with further trade off between increased profit margin, decreased asset utilization and|or reduced equity multiplier by the insurer managements to achieve a target-ROE; and the trend of cost efficiency was improving during 2000-2004. The study suggests that stock insurers could overcome their cost inefficiencies through adoption of efficient measures such as risk mapping of clients, risk prioritization besides ALM techniques. The study has direct implications for individual and institutional investors in making their portfolio investment decisions in insurance sector, policymakers, and regulators to closely monitor inefficient insurers consistent with Basel II norms. Copyright © 2008 John Wiley & Sons, Ltd.

Cost efficiency and board composition under different takaful insurance business models

“…Market conduct and corporate governance are probably the most effectively selfregulated areas in takaful insurance since takaful insurers commonly maintain a Shariah supervisory board comprising mainly Islamic scholars (Marie et al, 2009).…”

“…We believe that the findings of this study could offer all stakeholders -policyholders, insurers, Islamic scholars and government officials alike -a better guideline to further develop the takaful insurance industry. These contributions represent potentially important advances on recent exploratory studies of takaful insurance markets such as Marie et al (2009) and Abdul Kader et al (2010). For example, in the present study we examine whether the cost efficiency -corporate governance relation is affected by input-side macroeconomic influences such as inflation and the effects of interest rates.…”

“…We also focus on economic rather than accounting-based measures of insurers' performance in this study (Marie et al, 2009). Accounting-based performance ratio measures are deficient for this study because they combine both input and output efficiencies, thus likely distorting the measurement and analysis of efficiency performance (Pi & Timme, 1993).…”

Box Cox- Fourier Flexible Functional Forms in Stochastic Metafrontier Analysis: The Cost Effciency of the Insurance Industry in Malaysia

“…Studies on the efficiency of the Takaful industry with the application of the frontier method are still underdeveloped, although there were some studies using the Data Envelopment Analysis (DEA) technique by Abd Kader et al (2010) and Marie et al (2009), and in Malaysia (Norashikin et al 2011;Norma et al 2006). This study was conducted to improve the study on the efficiency and shape of the organisation for the insurance industry in Malaysia with the application of the Stochastic Metafrontier Analysis (SMFA) method.…”

A survey of life insurance efficiency papers: Methods, pros & cons, trends

“…Additionally Altunbas & Chakravarty (2001) reports that, even though compared to a translog functional form, a FF functional form may have a better fit to the data; it may have a worse predictive ability. In fact Marie et al (2009) finds that translog form outperformed the FF form.…”