Performance Benchmarking of Indian Life Insurers: A Hybrid Non-Parametric Approach

Performance Benchmarking of Indian Life Insurers: A Hybrid Non-Parametric Approach

Ram Pratap Sinha, Nitish Datta
Copyright: © 2015 |Pages: 10
DOI: 10.4018/IJMTIE.2015070104
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Abstract

In the last one 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. The present paper compares fifteen life insurance companies operating in India for the period 2005-06 to 2009-10 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. The results from the study indicate that out of the fifteen 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. However, in 2009-10 the number increased to 5. The mean technical efficiency scores of the in-sample life insurers declined sharply between 2005-06 and 2006-07 and improved somewhat thereafter. However, it again declined in 2009-10 implying a greater divergence in performance.
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2. Comparison Of Performance: The Methodological Issues

Productive 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 its proximity to the production frontier which is comprised of the best performing points. There are, however, two major alternative approaches towards defining technical efficiency: the Pareto-Koopmans approach and the Debreu- Farrell approach. These two approaches are now described in brief.

2.1. 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 an increase in at least 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. Pareto efficiency or Pareto optimality refers to an economic state in which it is impossible to make an individual better off without making at least another individual worse off.

2.2. The Debreu-Farrell Approach

This approach provides a radial measure of efficiency. This approach has developed due to two seminal papers by Debreu (1951) and Farrell (1957) For output maximisation, the Debreu-Farrell measure is defined as IJMTIE.2015070104.m01,where IJMTIE.2015070104.m02 is the maximum equi-proportionate expansion in all outputs with given input. For input minimisation, the Debreu-Farrell measure is IJMTIE.2015070104.m03 where IJMTIE.2015070104.m04 is the maximum equi-proportionate reduction in all inputs. A score less than unity (i.e. IJMTIE.2015070104.m05 or IJMTIE.2015070104.m06) implies that the firm is technically inefficient.

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