Comprehensive and Technical Efficiency of Insurance and Takaful Companies in Pakistan

Abstract

Comprehensive and Technical Efficiency of Insurance and Takaful Companies in Pakistan Insurance and Takaful companies, both, are business organizations existing for the motive of profit. Large capital is required by the shareholders to establish a company; therefore, the company is expected to earn sufficient profit to meet the expectations of the shareholders. Moreover, a company also has its responsibilities towards its customers in terms of quality service. Shareholders are more concerned with their profit and customers regarding the services. Companies pay claims when the covered persons suffer a loss which can be the death of the family’s only bread earner, factory on fire, theft of business goods etc. Therefore, efficient financial performance of insurance and Takaful companies is important to fulfil the requirements of both: shareholders and clients. This study investigates financial efficiency of insurance and Takaful companies via Data Envelopment Analysis during the period 2011 to 2015. We have taken six general (non - life ) insurance & Takaful companies operating in Pakistan with input factors labor cost, assets and output factors premium / contribution received and percentage of claims paid. Results show that insurance and takaful companies are more than 80% efficient in their operations. For further increasing their efficiencies, they need to reduce their input by less than 20% to have same level of output. Comparing efficiencies of insurance and takaful companies, insurance companies are more efficient in terms of pure technical & super efficiency while takaful companies have higher scale efficiency than insurance companies, though the difference in most of the cases is less than 2%. Both types of companies need to improve their efficiencies by decreasing their assets input and labor cost while retaining the same output level of premiums and claims. Keywords: General insurance, Data Envelopment Analysis (DEA); Malmquist index, Takaful, Scale and technical efficiency