Technical efficiency of insurers in China : evaluation, exploration and policy recommendations

• Main Author: Han, Zhongwei
• Published: Middlesex University 2006
• Subjects: 338.6041
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.485278

China joined the WTO in 2001 and has to fully open up its insurance market to foreign competitors by 2006. However, the domestic insurance market is overwhelmingly dominated by a few large state-ovvned or state-controlled firms in terms of premium income. As the market is still underdeveloped &YJ.d the demand for insurance is rising exponentially, there exists huge potential, opportunities as well as challenges for non-state, foreign and joint-venttlre insurance companies. Efficiency is a key concern of the management of insurance companies to make the company competitive in the market. Examination and exploration of efficiency issues also help policy makers regulate the insurance market and allocate resources in an appropriate way. This thesis aims to find out which insurance companies are the benchmarks in the Chinese insurance industry in terms of technical efficiency, where the efficiency gaps are among the insurers, what factors are influencing the technical efficiency of insurers, and what strategies and polices are possible to improve the efficiency. Based on a panel data set of 22 firms over the period 1999-2004, this thesis uses data envelopment analysis method (DEA) to evaluate insurance firm's efficiency and stochastic frontier measure (SFA) to check the robustness of the results. The results show that PICC and Hongkong Mingan are consistently technical efficient in the Chinese property-liability insurance sector and Xinhua and Ali\. are the benchmarks in the life insurance sector. The study also identifies the status of returns to scale of each insurer and the slacks and targets for inefficient companies to catch up their efficient peers. The information from the reference sets suggests a particular efficient company for inefficient insurers to emulate. In addition, the thesis looks at the impact of scale size and merger on the efficiency of insurers. Empirically, it is difficult for insurers to achieve technical efficiency where constant returns to scale hold, if firms are too big or too small. Moreover, a super efficiency model is constructed to compare the efficient insurers while windows analysis is adopted to test the stability and find out the trend of efficiency rating. This study is also the first attempt in the literature to conduct the Malmquist Index analysis in the Chinese insurance industry. The productivity growth of insurance companies is decomposed into technological progress, pure technical efficiency improvement and scale change. The results support the management of insurance companies to know their comparative advantages and figure out specific strategies to achieve productivity gain. Overall, this thesis expands the usages of DEA and SFA methods in the literature of studying the technical efficiency of insurance companies and provides enonnous managerial implications for both the management of insurance companies and policy makers.