Measuring Managerial Efficiency in Non-Life Insurance Companies: An Application of Two-Stage Data Envelopment Analysis

Article excerpt

This paper uses the two-stage data envelopment analysis (DEA), which was first used by Seiford and Zhu (1999), to measure managerial performance in 24 non-life insurance companies in Taiwan. Performance was measured by Marketability in the first stage, and Profitability in the second stage. In addition, this paper uses the Tobit regression model to examine factors that significantly influence managerial efficiency. Nine variables were employed to examine the model. The results revealed that marketability can be explained by; percentage of outer servers, number of branches, premium investment percentage and corporate image, while profitability can be explained by market share, percentage of premium reserved and corporate image. Moreover, the entire industry can be partitioned into four clusters based on marketability and profitability of a company. Effective management strategies need to be developed specially for of the four clusters of non-life insurance companies. It is hoped this study can provide useful information for managers of non-insurance companies in the future.

Introduction

As economies become more liberalized, many countries in Asia have gradually removed regulatory controls and opened up access to their insurance markets. There are many opportunities for insurance companies in Asia, but it is still a region undergoing change in terms of regulatory control, although this does vary from country to country. Taiwan's non-life insurance market was originally an oligopoly. In year 1982, two American non-life insurance companies were permitted to establish branches in Taiwan; in 1992, permission was granted to locals and eventually access to the non-life insurance market was fully opened to the public in 1994. Up until the end of 2002, there were 24 non-life insurance companies in Taiwan, 17 of them were local companies and 7 were foreign ones. Though the open access of market brought good business opportunities, it also introduced more competition that has prompted several companies to close down or to be merged.

Facing a highly competitive environment, the formulation of competition strategy, strengthening of corporate operations and upgrading of the quality of service have become essential for survival. In formulating competition strategies, one major problem is the measurement of management performance in the industry, prior to an assessment of advantages and disadvantages. Another problem encountered the determination of factors that affect managerial efficiency.

This paper uses the two-stage data envelopment analysis (DEA), which was first used by Seiford and Zhu (1999), using multiple inputs and outputs to measure the relative managerial efficiency of 24 non-life insurance companies in Taiwan. Marketability was measured in the first stage while profitability was measured in the second stage. According to the results of the two-stage DEA, this paper will further analyze the strengths and weakness of non-life insurance companies to know whether the outcomes were produced by market capability or investment capability. In addition, efficiency differences among different characteristics of the firms will be investigated and comparisons made of the efficiency of domestic and foreign companies, old and new companies, and different sized companies. The paper uses the Tobit regression model to examine the factors that significantly influence managerial efficiency. Finally, based on the measurement of managerial efficiency, a management decision matrix is developed to serve as a basis for an assessment of the competitive strategy of the 24 companies in Taiwan.

Problem

Issues

Taiwan, with a land area of 36,000 square kilometers, has a population of 20 million people. Government in early days restricted the expansion of insurance industry due to the conception of Taiwan only had minimal growth in the non-life insurance market. Back in those days, there were only four companies acting as the oligopoly in Taiwan's non-life insurance market and these companies are: Taiwan Fire, Chung Kuo, Tai Ping and China Mariners. …