Economies of Scope, Organizational Form, and Insolvency Risk: Evidence from the Takaful Insurance Industry

42 Pages Posted: 3 Feb 2015 Last revised: 16 Dec 2016

See all articles by Khalid Amri

Khalid Amri

Sultan Qaboos University

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Mary A. Weiss

Temple University

Date Written: December 29, 2014

Abstract

This study investigates scope economies, organizational form, and insolvency risk for a sample of takaful firms in 19 countries. Firm efficiency is estimated using data envelopment analysis, performance is also gauged using return on equity and return on assets, and insolvency risk is measured using distance to default. We test the strategic focus and conglomeration hypotheses for takaful operators. We also test for differences in performance between the two major takaful organizational forms – the mudharaba (profit-sharing) and the wakala (fee-based) models for compensating managers. The profit-sharing design is hypothesized to be more effective in aligning the incentives of managers and policyholders. The findings suggest that strategic focus is superior to conglomeration for takafuls in terms of performance, efficiency, and insolvency risk. The results also show that the profit-sharing model performs better than the fee-based model. This research is important because takafuls are growing rapidly in Muslim-dominated countries where insurance density and insurance penetration are low.

Keywords: Insolvency, Takaful, efficiency, organizational form, economies of scope, data envelopment analysis

JEL Classification: G22, G32, G28, L25

Suggested Citation

Amri, Khalid and Cummins, J. David and Weiss, Mary A., Economies of Scope, Organizational Form, and Insolvency Risk: Evidence from the Takaful Insurance Industry (December 29, 2014). Fox School of Business Research Paper No. 15-050. Available at SSRN: https://ssrn.com/abstract=2559885 or http://dx.doi.org/10.2139/ssrn.2559885

Khalid Amri

Sultan Qaboos University ( email )

PO Box 20
Al-khod SQU 123
Muscat
Oman

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Mary A. Weiss

Temple University ( email )

Fox School of Business and Management
1801 Liacouras Walk
Philadelphia, PA 19122
United States
215-204-1916 (Phone)

HOME PAGE: http://www.sbm.temple.edu/~rmidept/weiss.html

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