Efficiency, Productivity and Returns to Scale Economies in the Non-Life Insurance Market in South Africa

Abdul Latif Alhassan and Nicholas Biekpe
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Abdul Latif Alhassan: Graduate School of Business, University of Cape Town, Private Bag X3, Rondebosch, 7701, South Africa, Cape Town. E-mails: lateef85@yahoo.com; alhabd004@myuct.ac.za; nicholas.biekpe@gsb.uct.ac.za

The Geneva Papers on Risk and Insurance - Issues and Practice, 2015, vol. 40, issue 3, 493-515

Abstract: This paper undertakes a comprehensive analysis of efficiency, productivity and returns to scale economies in the non-life insurance market in South Africa from 2007 to 2012. The data envelopment analysis technique is employed to estimate efficiency and returns to scale while productivity growth is analysed with the Malmquist index. Truncated bootstrapped regression and logistic regression techniques are used to identify the determinants of efficiency and the probability of operating under constant returns to scale. The results indicate that non-life insurers operate with about 50 per cent inefficiencies, while about 20 per cent of insurers operate at an optimal scale. We also observe productivity improvements attributable to technological changes. The results of the regression analysis reveal a non-linear effect of size on efficiency and constant returns to scale. Product line diversification, reinsurance and leverage also have a significant relationship with efficiency and constant returns to scale. A major contribution of this paper is the analysis of efficiency convergence using the growth convergence theory. Implications for management and industry regulation are drawn from the findings.

Date: 2015
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