Frontier Efficiency Methodologies to Measure Performance in the Insurance Industry: Overview and New Empirical Evidence

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 87 studies and put them into a joint evaluation of efficiency measurement in the field of insurance. In the second step, a broad efficiency comparison of 3,555 insurers from 34 countries is conducted. Different methodologies, countries, organizational forms, and company sizes are compared, considering life and non-life insurers. We find a steady technical and cost efficiency growth in international insurance markets from 2002 to 2006, with large differences across countries. Denmark and Japan have the highest average efficiency, whereas the Philippines is the least efficient. Furthermore, the analysis shows that mutuals are more efficient than stock companies. Only minor variations are found when comparing different frontier efficiency methodologies (data envelopment analysis, stochastic frontier analysis). The results give valuable insights into the international competitiveness of insurers in various countries.

Keywords: Efficiency, Data Envelopment Analysis, Stochastic Frontier Analysis

JEL Classification: G22, M31, O16