This study was conducted in Ethiopian insurance companies in order to measure the technical efficiency using DEA input oriented approach under both constant and variable return versions and Malmquist index output oriented approach in the period 2006-2010. In the first stage, the relative technical efficiency is estimated with data envelopment analysis (DEA) to establish benchmarking company, then, they are ranked according to their technical efficiency. Mann whiney- U test in the second stage was used to determine the factors affecting efficiency. The concept of efficiency concerns is an insurer’s ability to produce a given set of outputs (such as premiums and investment income) via the use of inputs such as administrative and general expenses and financial capital. The insurance company is said to be technically efficient if it cannot reduce its input usage without some corresponding reduction in outputs, given the current state of production technology in the industry. The technical efficiency of Ethiopian insurance companies during the study period was 86.7%, 97.1% and 84.9% in technical efficiency, pure technical efficiency and scale efficiency, respectively. The productivity change shows Ethiopian insurance companies were quite well in efficiency change rather than technological change. It suggested that it is better to employ advanced technology to be efficient in competitive environment. So it is advisable Ethiopian insurance companies are better-off to follows the best practicing firms in the industry. The economic implications arising from findings were also considered.
Table of Contents
1. Introduction
1.1. Background of the Study
1.2. Statements of Problems
1.3. Objective of the Study
1.3.1. Specific objectives:
1.4. Significance of the Study
1.5. Scope and Limitation of the Study
1.6. Organization of Paper
2. Related Literature Review
2.1. Theoretical Literature
2.1.1. Concept of Efficiency
2.1.2. Parametric Approach
2.1.3. Mathematical Programming Methods
2.1.4. Basics of DEA
2.1.5. DEA and Technical Efficiency
2.1.6. The Constant Return to Scale (CRS) DEA
2.1.7. The Variable Return to Scale (VRS) DEA
2.1.8. Scale Efficiency
2.1.9. Malmquist Productivity Index
2.1.10. Inputs and Output Determination
2.2. Empirical Literature Review
3. Research Methodology
3.1. Research Design:
3.2. Data Source and Types
3.3. Sampling Techniques
3.4. Data Analysis
3.5. Specification of Mathematical Model DEA
4. Results and Discussions
4.1. Production Frontier and Efficiency
4.2. The Overall Technical Efficiency Scores and Its Indications
4.3. Peers and Virtual Inputs of Inefficient Insurance Companies
4.4. Factor which Determine Technical Inefficiency of Insurance Company
4.5. Malmquist Productivity Index of the Insurance Companies
4.6. Productivity Performance of Insurance Industry
5. Conclusion and Recommendation
5.1. Conclusions
5.2. Recommendation
Research Objectives and Themes
This study aims to evaluate the technical efficiency and productivity changes of Ethiopian insurance companies from 2006 to 2010. By utilizing the Data Envelopment Analysis (DEA) method, the research investigates the sources of inefficiency and identifies potential areas for performance improvement within the competitive insurance landscape of Ethiopia.
- Measurement of technical efficiency using DEA (CCR and BCC models).
- Decomposition of efficiency into pure technical and scale efficiency components.
- Application of the Malmquist Productivity Index to analyze technological and efficiency changes.
- Investigation of internal and external factors affecting efficiency using the Mann-Whitney U-test.
Excerpt from the Book
1.1. Background of the Study
According to the finance-growth nexus theory financial system development promotes economic growth through marginal productivity of capital, efficiency of channeling saving to investment, saving rate and technological innovation (Levine, 1997 as cited in Curak, Lončar & Poposki, 2009). In performing functions of financial system, insurance companies play an important role. Insurance firms are main risk management tool for companies and individuals, through issuing insurance policies; they collect funds and transfer them to deficit economic units for financing real investment. Therefore, according to this theory insurance sector could be one of the factors contributing to economic growth (Curak et al., 2009).
Insurance company provides services, like making the usual risk financing, pooling and transfer, investment, and real services and advice. The efficient operations of such activities by insurance industry could be appropriate to contribute economic development. The concept of efficiency in insurance is concerns an insurer’s ability to produce a given set of outputs (such as premiums and investment income) via the use of inputs such as administrative and sales staff and financial capital. An insurer is said to be technically efficient if it cannot reduce its resource usage without some corresponding reduction in outputs, given the current state of production technology in the industry (Brien, Diacon & Starkey).
Efficiency for insurance companies is of interesting in contemporary economics, considering the increasing risks related to environmental and globalization issues in the world today. Efficiency has been the focus of most research in insurance in the recent past (Barros & Obijiaku, 2007).
Summary of Chapters
1. Introduction: Outlines the background of the Ethiopian insurance industry, defines the problem of efficiency measurement, and establishes specific objectives for the research.
2. Related Literature Review: Provides a theoretical framework on efficiency concepts, DEA models, and reviews empirical studies on insurance efficiency in both developed and developing countries.
3. Research Methodology: Details the research design, data sources, sampling techniques, and the mathematical specification of the DEA and Malmquist productivity models used.
4. Results and Discussions: Presents the findings regarding technical efficiency scores, identifies inefficient firms, analyzes peer relationships, and discusses the results of the Malmquist index.
5. Conclusion and Recommendation: Summarizes the key findings on efficiency and productivity and provides policy recommendations for enhancing the performance of Ethiopian insurance firms.
Keywords
Insurance companies, DEA, Data Envelopment Analysis, Technical efficiency, Malmquist index, Productivity, Ethiopia, Financial performance, Scale efficiency, Pure technical efficiency, Benchmarking, Resource utilization, Insurance market, Operational performance, Efficiency determinants.
Frequently Asked Questions
What is the primary focus of this research?
The research focuses on measuring the technical efficiency and productivity growth of Ethiopian insurance companies over the period 2006-2010.
Which methodology is employed to measure efficiency?
The study uses Data Envelopment Analysis (DEA), specifically employing CCR and BCC models for technical efficiency and the Malmquist index for productivity analysis.
What are the central themes of the investigation?
The central themes include the assessment of resource utilization, the decomposition of efficiency into technical and scale components, and the identification of determinants influencing insurer performance.
What is the research objective regarding insurance performance?
The primary objective is to evaluate overall technical efficiency, identify sources of inefficiency, measure productivity changes, and propose strategies for improvement.
What does the main body of the study cover?
The main body covers the theoretical background, the mathematical models for DEA, empirical literature, detailed results of the efficiency scores, and the application of the Mann-Whitney U-test to analyze performance determinants.
Which keywords characterize this work?
The key terms include Insurance companies, DEA, Technical efficiency, Malmquist index, and Ethiopian financial sector.
Why were the years 2006-2010 selected for this study?
The period was chosen to allow for sufficient data observations (45 total) relative to the number of input/output variables, ensuring the statistical validity of the DEA results.
What role does the Mann-Whitney U-test play in this research?
It is used as a second-stage analytical tool to test hypotheses regarding whether company size (scale of operation) and market share positively correlate with technical efficiency.
- Citar trabajo
- Mulugeta Abuye Ertiro (Autor), 2012, Measurment of Technical efficiency of Ethiopian insurance companies.Technical efficiency, Múnich, GRIN Verlag, https://www.grin.com/document/442848
