Efficiency of General Insurance in Malaysia Using Stochastic Frontier Analysis (SFA)

Transcription

1 Inernaonal Journal of Modern Engneerng Research (IJMER) Vol., Issue.5, Sep-Oc. 01 pp ISSN: Effcency of General Insurance n Malaysa Usng Sochasc Froner Analyss (SFA) Mohamad Arf Awang Naw 1, Wan Muhamad Amr W Ahmad and Nor Azlda Aleng 3 (Deparmen of Maemacs, Faculy of Scence and Technology, Unvers Malaysa Terengganu (UMT) 1030 Kuala Terengganu, Terengganu, Malaysa) ABSTRACT: General nsurance comprses nsurance of propery agans fre and burglary, floods, sorms, earquakes and so on. The purpose of e curren sudy s o measure e relave effcency of general nsurance n Malaysa by usng SFA for e year 007 unl 009, conss of 6 general nsurance companes by usng e sofware FRONTIER o oban e maxmum lkelhood (ML) and o ge e relave effcency. The fndng showed a Orenal Capal Assurance Bhd (OCA) s a rank 1 for e ree years. The value for e varance gamma ( ) parameer n s sudy s far from one, suggesng a all of e resdual varaons are no due o e neffcency effecs, bu o random shocks. I can erefore, be concluded a e echncal neffcency effecs assocaed w e producon of e oal profs by e npu of e general nsurence are very low. Keywords: Effcency, sochasc froner analyss, specfcaon of Baese and Coell, general nsurance. I. INTRODUCTION Insurance s a form of rsk managemen n whch e nsured ransfers e cos of poenal loss o anoer eny n exchange for moneary compensaon known as e premum. General nsurance comprses nsurance of propery agans fre and burglary, floods, sorms, earquakes and so on. I covers personal nsurance as well as nsurance agans accdens and also covers heal nsurance and lably nsurance whch guards legal lables. Then agan covers oer areas such as errors and omssons, nsurance for professonals, cred nsurance ec. Mos general nsurance polces are annual and e premum paymen s n advance. No rsk commences unless you have pad e premum. In some long erm polces companes have e facly of collecng premums perodcally []. Ths sudy ams o measure e relave effcency of 6 general nsurance companes n Malaysa from 007 o 009. The man objecves denfed are as follows:. Measure e relave effcency of performance for e general nsurance ndusry.. Idenfy e mos effcen general nsurance companes based on relave effcency scores.. Analyze e comparave effcency of general nsurance companes n Malaysa. v. To esmae echncal effcency of general nsurance by usng Sochasc Froner Analyss. II. LITERATURE REVIEW Fecher e al. [10] has been usng e Sochasc Froner Analyss (SFA) o analyze e cos and effcency of lfe nsurance and general nsurance n France usng daa from 1984 o From e sudy found a e average level of effcency for lfe nsurance s 30% and general nsurance s 50%. Greene and Segal [11] have examned e relaonshp beween cos neffcency and prof for e lfe nsurance ndusry n e Uned Saes. Prof s mporan for an nsurance frm because of capal gans and deermnes e poenal of a frm. Greene and Segal [11] dsngush e cos of effcency usng e sochasc froner whch s meod usng neffcen means for searchng e dversy of frms and oupu. They also proposed a e cos effcency n e lfe nsurance ndusry wll be srong when ere s urnover and neffcency occurs when e gan s measured by reurn on equy. Fenn e al. [9] had use sochasc froner analyss o esmae Flexble Fourer cos and prof funcons for European nsurance companes. They also adop a maxmum lkelhood approach o esmaon n whch e varance of bo one-sded and wo-sded error erms s modeled jonly w e froners. Ths approach causes a smulaneously conrol for e mpac of heeroscedascy on e esmaon of scale economes as well as esmang e effec of frm sze and marke srucure on X-neffcency. Separae froners are esmaed for lfe, nonlfe and composes companes and use daa se of fnancal repors for e perod 1995 o 001. Ths provdes echncal and non-echncal accouns a year-end for lfe, non-lfe and compose nsurance busnesses n 14 major European counres. The resul showed a esmaes mos European nsurers are operang under condons of decreasng coss, and a company sze and marke share are sgnfcan facors deermnng X-neffcency w respec o bo coss and profs. Fenn e al. [9] also sae a e larger frms and ose w hgh marke shares end o have more cos neffcency bu less prof neffcency. Kasman and Turgulu [19] nvesgaes e echncal effcency of a sample of Turksh lfe nsurance frms usng e deermnsc daa envelopmen analyss (DEA), chance-consraned daa envelopmen analyss (CCDEA) and sochasc froner analyss (SFA) for e perod 1999 o 005. The man objecve s o provde new nformaon on e effec of meodologcal choce on e esmaed effcency by applyng economerc and maemacal programmng echnques o e same daa se of Turksh lfe nsurance frms. The emprcal resuls show a e paramerc and non-paramerc meods provde smlar rankngs of frms bu ey dffer sgnfcanly when e mean effcency scores are 3886 Page

2 Inernaonal Journal of Modern Engneerng Research (IJMER) Vol., Issue.5, Sep-Oc. 01 pp ISSN: consdered. From e resuls sugges a e sochasc srucure of e CCDEA approach does no elmnae e fundamenal dfferences beween DEA and SFA. From e resul, e ree echnques sugges a ere s a sgnfcan neffcency problem n e Turksh lfe nsurance ndusry over e sample perod. For e eorecal of sochasc froner funcons have no explcly formulaed a model for e neffcency effecs. Emprcal papers, n whch e ssue of e explanaon of e neffcency effecs has been rased nclude Kalrajan [14][15][16], Kalrajan and Flnn [17], and Kalrajan and Shand [18]. Ther sudes adop a wosage approach. The frs sage nvolves e specfcaon and esmaon of e sochasc froner producon funcon and e predcon of eer e neffcency effecs or e echncal effcences of e frms nvolved. The second sage of e analyss nvolves e specfcaon of a regresson model for eer e predced neffcency effecs or e levels of echncal effcency of e frms n erms of varous explanaory varables and an addve random error. The parameers of s second-sage neffcency model have been generally esmaed by usng ordnary leas-squares regresson. Sudy n Malaysa conduced by Shazal and Alas [3] revew e performance of producvy and effcency e lfe nsurance ndusry for e communy n Malaysa. Ths sudy s an aemp o measure producvy n e lfe nsurance ndusry based on e meod of Malmqus Non-paramerc Index. The sudy found a alough e nsurance ndusry producvy s ncrease bu e relave grow of lfe nsurance s sll low compared w e acual grow of e Malaysan economy. Jus as e manufacurng secor, s secor's fuure grow depends on s ably o compee effcenly. The ably o provde effcen servce s an mporan source of compeve advanage n e era of globalzaon. The sudy also found a e effcency of echnology developmen and conrbue o e overall producvy n e ndusry. III. SPECIFICATION OF STOCHASTIC FRONTIER MODEL Berger e al. [6] and Berger and Humphrey [5] has nroduced wo echnques o measure effcency. There are several economerc (paramerc approach) and lnear programmng (nonparamerc approach). The paramerc approach has e advanage of allowng nose n e measuremen of neffcency. However, e approach needs o specfy e funconal form for producon, cos or prof. Coell [8] sae a e nonparamerc approach s smple and easy o calculae snce does no requre e specfcaon of e funconal. The meod for s sudy s Sochasc Froner Analyss (SFA) by usng e model of Baese and Coell [3]. SFA s a way n economc modelng. Agner, Lovell, and Schmd [1], Meeusen and van den Broeck [1], and Baese and Cora [4] nroduced e paramerc approach o esmae sochasc producon froners. These approaches specfed a paramerc producon funcon and a wo-componen error erm. One componen, reflecng e nfluence of many unaccounable facors on producon as well as measuremen error, s consdered nose and s usually assumed o be normal. The oer componen descrbes neffcency and s assumed o have a one-sded dsrbuon, of whch e convenonal canddaes nclude e half normal [1], runcaed normal [4], exponenal [1] and gamma [1][13] [4]. Baese and Coell [3] assume a radonal random error ( V ) and a nonnegave error erm ( U ) represenng e echncal neffcency. Here, V s assumed o be ndependen and dencally dsrbued,..d N (0, σ v) and capures sascal nose, measuremen error, and oer random evens (.e., economc suaons, quakes, weaer, srkes and luck) a are beyond e company s conrol. The non-negave error erm ( U ) capures e neffcency and s assumed o be..d as runcaons a zero of e N (µ, σ U). Also, V s assumed o be ndependen of e follows: Y Where X (V Y U U. The model may be formed as ) s oupu of e 1,...,K; 1,...,T frm n e (1) me perod; X s a K 1 vecor of npus of e frm n e me perod; s a K 1 vecor of unknown parameers; V and U are assumed o have normal and half-normal dsrbuon, respecvely. Ths meod can comple e effcency of e nsurance company accordng o s funcon and no usng a specfc dsrbuon funcon. Feaures found n s meod are suable for measurng e effcency of nsurance companes because wll be arranged n e mos effcen level. W e nformaon obaned from s sudy can help rehablae e makng of new polces for mprovemen and furer enhance e grow of e general nsurance ndusry n Malaysa. Accordng o e equaon, e model for a specfc general nsurance used n s sudy s: log Y 4 where, Y x 1 x x V U = oal profs of companes of e 3 3 () company n e me perod = vecor of unknown parameers o be esmae = ne nvesmen ncome of e me perod = managemen expenses of e me perod = oal lables and asses of e e me perod company n e company n e company n x 4 = annual premum of e company n e me perod x 5 = ne clams pad by e company of e company n e me perod U = non-negave random varables, assocaed w Page

3 Inernaonal Journal of Modern Engneerng Research (IJMER) Vol., Issue.5, Sep-Oc. 01 pp ISSN: echncal neffcency of oal profs of companes. V = assumed o be ndependen and dencally dsrbued (..d) N (0, σ v) and capures sascal nose, measuremen error, and oer random. Baese and Coell [3] has proposed a sochasc froner producon funcon s defned for panel daa on frms, n whch e non-negave echncal neffcency effecs are assumed o be a funcon of frm-specflc varables and vary over me. The neffcency effecs are assumed o be ndependenly dsrbued as runcaons of normal dsrbuons w consan varance, bu means whch are a lnear funcon of observable frm-specflc varables. The generalzed lkelhood-rao es s consdered for esng e null hypoeses, a e neffcency effecs are no sochasc or a ey do no depend on e frm-specflc varables. The varance parameers are: v u The maxmum-lkelhood meod s appled for e esmaon of e parameers of e model and e predcon of e echncal effcences of e frms over me. Ths meod gves more sasfacory resuls as more effcen an e meod of ordnary leas squares (OLS) []. Parameers ( ) mus be n e range beween 0 and 1. Parameers for e sochasc producon funcon esmaed usng e maxmum-lkelhood esmaon meod and e calculaon by usng e Froner Verson 4.1c [7]. u / So a 0 λ 1. (4) Gven e specfcaon of e sochasc froner model n Equaon (1), e echncal effcency of producon of e frm gven e level of npus s defned as: (3) o maxmze e npu whch s very well wou any problems. The oal number of observaons from s sudy s 6 frm operang n Malaysa general nsurence ndusry over e perod 007 o 009. Ths me perod was chosen because e me had remaned n a sable phase afer a varey of e economc recovery process n Malaysa. The resuls showed an ncrease from year o year as shown n Table 1 for general nsurance. Ths posve mprovemen show a e nsurance ndusry has been n hgh demand among e people. I was found a all general nsurance companes o perform as ndcaed when er effcency s a 0.8 or 80% and above. The resul showed a Orenal Capal Assurance Bhd (OCA) s a rank 1 for e ree years and has a relave effcency score hgher an mos oer companes. Effcency scores for OCA company sars from 0.94 n 007 and ncreased o 0.97 n 009. Score for e second posons BERJAYA and MUI CONTINENTAL. All wo of ese nsurance companes ge score as much as 0.9 n 007, ncreased o 0.94 for year 008 and 0.96 n 009. Besdes a, Pacfc & Oren (P & O) nsurance oban a score of 0.91 n 007 (rank 3). In 008 e P & O nsurance company showed an ncrease of 0.03 (0.94) and n 009 e score was The las poson s PROGRESSIVE company obaned score 0.86 (rank 8) n 007, 0.90 (rank 6) n 008 and 0.93 (rank 5) n 009. Mean of effcency score of general nsurance companes were ncreasng from year o year presened n Table 1. Every company ndcaes good performance by e year o manage e company's managemen expenses as well as possble n order o prof e whole companes. Table 1: Relave Effcency Score for General InsuranceCompanes from Year 007 o 009 TE exp ( u ) (5) So a 0 TE 1 are nversely relaed o echncal neffcency [0]. In s sudy, e parameer s mporan because faclaes e analyss of e effcency of general nsurance companes o be suded effcenly or no. The es sasc and dsrbuon are used. Sgnfcance level used n s sudy are 0.05 and The hypoess of e sudy s as follows: H 0 : = 0 where, echncal neffcency of e nsurance company nvesgaed H 1: > 0 where, echncal effcency of e nsurance company nvesgaed IV. RESULTS ANALYSIS Ths sudy dscusses abou e general nsurance company where effcency score ndcaes e hghes value s e mos effcen and reflecs e company s able (Sources: Model Oupu Dsplay by Baese and Coell, 199) Page

4 Inernaonal Journal of Modern Engneerng Research (IJMER) Vol., Issue.5, Sep-Oc. 01 pp ISSN: Fgure 1 shows e relave effcency of general nsurance companes for a perod of 3 years commencng from 007 o 009. From e dagram below, can conclude a e performance effcency of e general nsurance ndusry ncreased by an ncrease of 0.0 (%) o 0.04 (4%) per year. Table : Resuls of Maxmum Lkelhood Esmaon for e General Insurance Indusry Fg. 1: Relave Effcency Score for General Insurance Companes from Year 007 o 009 Table presens e maxmum lkelhood esmae (MLE) for e parameers of e lnear producon funcon and realaed sascal ess resuls obaned from e sochasc froner analyss. The esmaed producon funcon parameers ndcaed a ne nvesmen ncome, managemen expenses, oal lables and asses, annual premum and ne clams pad by e company. The esmaed sgma-squared ( ) n s sudy s and sascally dfferen from zero a one percen. The resul ndcaes a e one-sded error erm domnaes e symmery error ndcang a good f and e correcness of e specfed dsrbuonal assumpons. The resul obaned from esng e hypoess of a general nsurance company s calculaed sasc s and s less an e crcal value of sascs.375 ( ). Therefore, e null hypoess s no rejeced a sgnfcance level Ths ndcaes s no sgnfcan relaonshp beween ne nvesmen ncome, managemen expenses, annual premum and ne clams pad by company. The value for e varance gamma ( ) parameer n s sudy s far from one, suggesng a all of e resdual varaons are no due o e neffcency effecs, bu o random shocks. I can erefore, be concluded a e echncal neffcency effecs assocaed w e producon of e oal profs by e npu of e general nsurence are very low. Nevereless, e gamma whch s sascally sgnfcan suggess a e radonal (OLS) funcon s no an adequae presenaon. Resuls of maxmum lkelhood esmaon (MLE) found a e elascy of e oal profs for annual premum s e hghes Ths means a w an ncrease 1% n npu annual premum wll ncrease by % on e profably of general nsurance companes. For e npu of e ne nvesmen ncome, e elascy of e oal prof s Ths means a 1% ncrease n ne nvesmen ncome npu resuled n an ncrease of 0.178% on e profably of general nsurance companes. V. CONCLUSION AND DISCUSSION Ths sudy focuses on sochasc froner analyss approach (SFA) a nvolves economerc meods used o analyze e effcency of general nsurance companes n Malaysa. Baese and Coell model [3] s used o oban e relave effcency of general nsurance companes from year 007 o 009. From e sudy, e relave effcency for general nsurance companes have been ncreasng from year o year. Companes who posed scores e hghes relave effcency for general nsurance s Orenal Capal Assurance Bhd (OCA) s a rank 1 for e ree years and has a relave effcency score hgher an mos oer companes. Effcency scores for OCA company sars from 0.94 n 007 and ncreased o 0.97 n 009. In addon, e effcency performance of e general nsurance ndusry ncreased by an ncrease of of 0.0 (%) o 0.04 (4%) by year. The value for e varance gamma ( ) parameer n s sudy s far from one, suggesng a all of e resdual varaons are no due o e neffcency effecs, bu o random shocks. MLE found a e elascy of e oal profs for annual premum s e hghes and e second hghes s ne nvesmen ncome where e elascy of e oal prof s The resuls of s sudy also assessed by lookng a e effcency score. Accordng o e rank of effcency ncluded n s sudy can help people n selecng and evaluang general nsurance companes a have good performance. Ths sudy also wll help e managemen and admnsraon of nsurance frms nvolved n makng and mproves e weaknesses, such as formulang busness sraegy or markeng sraegy o arac cusomers who can benef e frm. Ths sudy can also be used as a benchmark n deermnng e effcency of nsurance companes n Malaysa accordng o e approprae model. REFERENCES [1] Agner, D. Lovell, C. A. K & Schmd P Formulaon and esmaon of sochascfroner producon funcon models. Journal of Economerc 6: [] ArcleWorld. May 01. General Insurance. Avalablea.hp:// _nsurance. [3] Baese, G. E., & Coell, T. J Froner producon funcons, echncal effcency and panel daa: W applcaon o paddy farmers n Inda. Journal of Producvy Analyss 3: Page

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