Abstract
In the last decade, the life insurance companies operating in India have made significant progress in terms of business consolidation. In view of the same, it is of interest to make an enquiry about the operating performance of these companies. This chapter compares 15 life insurance companies operating in India from the period 2005-06 to 2008-09 using the Hybrid Efficiency Model (Tone, 2004). The Hybrid Model provides a unified framework for the estimation of technical efficiency integrating the radial and non-radial characterisation of inputs and outputs. Out of the 15 in-sample life insurance companies, the number of technically efficient life insurers declined from 9 in 2005-06 to 4 in 2006-07 and further to 3 in 2007-08 and 2008-09. The mean technical efficiency scores of the in-sample life insurers declined sharply between 2005-06 and 2006-07 and improved somewhat thereafter.
TopProductive efficiency of a productive unit can be measured by comparing its performance with the best practice unit in the industry following the same technology. Technical efficiency is typically measured in terms of technical efficiency.There are,however, two major alternative approaches towards defining technical efficiency: the Pareto-Koopmans approach and the Debreu- Farrell approach:
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The Pareto-Koopmans Approach: As per Koopmans (1951), a producing firm is technically efficient if an increase in any output necessitates a reduction in at least one other output or a increase in atleast one input, and if a reduction in any input necessitates an increase in at least one other input or a reduction in at least one output. This approach is called Pareto-Koopmans approach because of its Paretian implication.
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The Debreu-Farrell Approach: This approach provides a radial measure of efficiency.This approach has developed due to two seminal papers by by Debreu (1951) and Farrell(1957) For output maximisation, the Debreu-Farrell measure is defined as 1-q,where q is the maximum equi-proportionate expansion in all outputs with given input. For input minimisation,the Debreu-Farrell measure is 1-c where c is the maximum equi-proportionate reduction in all inputs. A score less than unity(i.e. 1-q<1 or 1-c<1) implies that the firm is technically inefficient.
Estimation of Technical Efficiency
Estimation of technical efficiency (in the production approach) requires construction of production frontier because efficiency is computed by measuring the distance of an observed point from an idealized production frontier.There are however, two major competing paradigms for the construction of production/economic frontiers: parametric (econometric) and non parametric (mathematical programming approach).The present paper uses the non-parametric approach(DEA).
Key Terms in this Chapter
Performance Benchmarking: Assessment of performance of Decision Making Units relative to an existing/constructed benchmark.
Non-Parametric Approach: The non-parametric approach to efficiency estimation is an approach which does not assume any parametric form of relationship between output(s) and input(s) of a decision making unit.
Data Envelopment Analysis: A non-parametric tool for assessment of the performance of decision making units under the assumptions of convexity, free disposability etc.
Life Insurance Industry: The industry comprising of firms offering life insurance.
Hybrid Model: The Hybrid DEA model was proposed by Tone in 2004. The feature of the hybrid model is such that it can accommodate inputs and outputs of both radial and non-radial character.
Efficiency Decomposition: Decomposition of efficiency into radial and non-radial components both from the input and output point of view.
Technical Efficiency: The efficiency of a decision making unit relative to the best practice frontier in terms of input usage or production of output or both.