Abstract
The non-life insurance companies indemnify the properties from the risk of being damaged due to unforeseen events like natural calamity or accidents. The probability of bankruptcy is imminent on account of large, unprecedented claims. As a risk saver of various society stakeholders, these insurers must be efficient while managing the insurance business. The present research thrusts upon to evaluate the efficiency and decomposition that would further direct the insurers towards achieving optimal scale. Thus, the captioned research aims to measure and rank the technical efficiency of the general insurance firms of Ethiopia and evaluate and analyze their relative efficiencies. The research adopts a quantitative approach and deploys descriptive analysis by a panel data of 17 Ethiopian general insurers for the period 2005-2016 on the input-output-oriented approach of Data Envelopment Analysis (DEA). The data of general insurance are obtained using stratified sampling from the mix of life and general category. The inputs employed are total expenses, total liabilities, and shareholder’s fund, while net premiums earned and income from investments are used as outputs. The findings reveal that the public insurer is technically efficient by operating at an optimal scale as compared to all private insurers who, in turn, experience pure technical inefficiency to scale inefficiency due to poor management practices and erroneous utilization of input materials. Increasing Returns to Scale (IRS) witnessed a major form of scale inefficiency in 2016. Private insurers should increase capital and size of assets, cost efficiency, and improve key management skills. AcknowledgmentThe authors express their thanks of gratitude for the support extended by Ethiopia’s insurance companies’ officials to provide the hard copies of published annual reports up to 2016 as the secondary data are not available after that year’s analysis.
Highlights
A country’s financial system comprises financial institutions, financial assets, and organized capital markets through a blend of financial services
Gollani and Roll (1989) noted the over- The technical efficiency of all the insurance firms all efficiency of each DMU into Pure Technical has been divided into Overall Technical Efficiency, Efficiency (PTE) and Scale Efficiency (SE) by CCR Pure Technical Efficiency, and Scale Efficiency
The common output varia- surance companies are analyzed under CCR modbles are premiums income and investment income el (Charnes et al, 1978) and BCC model (Banker in numerous insurance efficiency studies (Saad, et al, 1984). 2012; Abduh et al, 2012; Eling & Luhnen, 2010)
Summary
A country’s financial system comprises financial institutions, financial assets, and organized capital markets through a blend of financial services. The motto behind the financial system is to transform and channelize the spare capital from the hoarders to the scarcity sectors to balance capital distribution, fueling economic growth. The insurance sector is an integral chunk of the financial system and becomes an apparatus for the nations’ economic growth by indemnifying the individuals’ risks, assets, and corporates at large. Insurance plays a dynamic role among stakeholders such as investors, customers, policymakers, administrators, managers, governments, and after all, the communities to safeguard them from unforeseeable risk. The policymakers expect the insurance companies to perform in the best interest of society’s social cause. The insurance sector acts as a cushion to mitigate the perils of risks associated with people, the property of a country, the absence of which could derail economic growth.
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