Academic journal article Indian Journal of Economics and Business

Analyzing Firm Performance in Non-Life Insurance Industry-Parametric and Non-Parametric Approaches

Academic journal article Indian Journal of Economics and Business

Analyzing Firm Performance in Non-Life Insurance Industry-Parametric and Non-Parametric Approaches

Article excerpt


This study investigates productive efficiency and total factor productivity growth for Indian non-life insurance industry after deregulation. The empirical analysis uses seven years panel data from twelve leading non-life insurers that accounts for above ninety-five per cent of the business in the industry. Productive efficiency estimates are based on Battese and Collie (1995) Stochastic Frontier inefficiency-effect model and Fixed Effect Stochastic Frontier model. Dynamic productivity index (Malmquist index) is estimated using data envelopment analysis (DEA). The study found differences in efficiency scores obtained from parametric (regression) and nonparametric (DEA) methods. Regression analysis found net claims, operating expenditure, and total investment are positively related to net premiums earned. Dynamic productivity analysis found eight out of twelve firms achieved gain in total factor productivity growth.

Keywords: Stochastic, Malmquist, Productivity, Frontier, Nonlife

JEL Code: G22; C14; G14


Over the last decade insurance industry is moving toward the developing countries where the governments are actively pursuing deregulation and liberalization policies. Financial liberalization acts as incentive and draws foreign domestic investment (FDI) leading to a free flow of insurance services across the national boundaries. Between 1997 and 2004 insurance sector in emerging markets grew by 52 per cent compared to 27 per cent in the industrialized nations (UNCTD, 2007). Although the global financial crisis in 2007-09 made a dent on the flow of FDI worldwide, according to a recent report by the United Nations survey of transnational corporation (TNC) (WIPS, 2010) the FDI flow will reach USD 1.5 trillion in 2011 and USD 2.0 trillion in 2012 which is close to pre-crisis level. Surprisingly, the survey found that in the post-crisis recovery era for the first time the emerging countries like India, China, and Russian Federation are the top recipients of FDI investor countries in 2012. The growth of non-life insurance premium in 2010 in emerging markets is 22 per cent compared to 1.0 per cent for the industrialized countries and 2.1 per cent for the world (Swiss Re, 2010). A major part of the FDI flow in India is expected in the financial services sector, the non-life insurance industry in particular. India's insurance industry is one of the fastest growing markets in the global insurance industry.

The non-life insurance (property/casualty and health) premium in India for the year ended 31st March 2011 grew 28 per cent over the previous year (Towers, 2011). Unfortunately for India the insurance density (ratio of premiums to total population) and insurance penetration (ratio of premiums to GDP) numbers for non-life insurance are among the lowest in Asia. This implies there is a significant room for growth potential (Table 1). As India's GDP is expected to grow by 8.0-8.5 per cent for 2011 and 8.3-8.8 per cent for 2012, the role of insurance services as provider of risk transfer and indemnification and a promoter of growth will increase in the future (S & P, 2011). Studies have found that with the growth in national income both insurance density and penetration increase, more-so for the life than for nonlife since life insurance is more income elastic (Beck et al. 2010). With changing population demographics such as, increasing income and fast urbanization the demand for vehicles, increased awareness for health care, and customized sophisticated risk products would increase the demand for non-life insurance significantly in the near future. The deregulation and liberalization of insurance industry in 2000 and de-tariffing of the general insurance sector in 2007 is assumed to have improved the operating efficiency of the existing domestic companies through increased competition and by bringing in new techniques, skills, training procedures, and product innovations The number of non-life insures increased from 11 (2000) to 26 (2011), 4 being public and 22 private. …

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