Cost efficiency in Australian general insurers: A non-parametric approach

Abstract

Data envelopment analysis is used to calculate pure technical, scale, allocative and cost efficiency indices for a sample of forty-six Australian general insurers. The inputs used are labour, physical capital (in the form of both information technology and plant and equipment), and financial capital. The outputs are net premium revenues for housing-related, transport-related, indemnity-related, mortgage-related, and other insurance, along with invested assets. The results indicate that the major source of overall cost inefficiency would appear to be allocative inefficiency rather than technical inefficiency and that the largest 20% of insurers are significantly more efficient than the remaining firms. A second-stage analysis uses limited dependent variable regression techniques to relate efficiency scores to firm-specific information. Cost efficiency appears to be closely related to asset size but not to stock exchange listing or product diversification or specialization.