MARKET STRUCTURE AND EFFICIENCY OF INSURANCE COMPANIES IN AZERBAIJAN REPUBLIC

Idia J.Sci.Res. 7 (1): 114-120, 2014 ISSN: 0976-2876 (Prit) ISSN: 2250-0138(Olie) MARKET STRUCTURE AND EFFICIENCY OF INSURANCE COMPANIES IN AZERBAIJAN REPUBLIC 1 HANIFEHZADEH LATIF PhD, Ardabil Brach, Islamic Azad Uiversity, Ardabil, Ira ABSTRACT The mai purpose of the preset research is to determie appropriate structure cocerig the size ad volume of isurace compaies i order to icrease the performace, efficiecy, ad to decrease the average costs of productio. Icreasig the performace of a isurace compay is effective i ecoomic growth ad developmet, moetary ad fiacial stability ad ecoomic savigs. Uder cosideratio, statistical uiverse of this research is Azerbaija isurace compaies that have bee active i isurace Compaies market durig 2009-2010.I order to test the assumptios of the research, iformatio about fiacial statemets of isurace compaies has bee studied ad aalyzed durig the three years of 2009-2010 by usig method data evelopmet aalysis. Fidigs from the research show that isurace compaies i Azerbaija with large size ad more share tha market ejoy the highest performace compared to other compaies. KEYWORDS: Market structure scale Ecoomic Techical -coefficiet peetratio Improvemet i market structure will lead to icrease i performace ad ecoomic savigs of isurace compaies. Icrease i ecoomic savigs at ecoomic macro levels will result i icrease i isurace coefficiet peetratio, satisfactio of isured parties ad growth ad flourish i isurace idustry. Because of low isurace coefficiet peetratio, ifluece of isurace ad lack productio of isurace premium i Azerbaija isurace idustry it is ecessary to doe may ivestigatios i the Azerbaija i the isurace market. With comparig the ifluece coefficiet of the isurace compaies i Azerbaija with world isurace compaies, it becomes clear that ifluece coefficiet at the year of 2010 i Azerbaija is.52 ad at the same time i the world are 6.98 ad i the Europe are 7.47.Therefore it is ecessary should be ivestigated the ways of icreasig isurace premiums ad icreasig the coefficiet ifluece of isurace i Azerbaija. Usig the advatages of icreasig productio capacity ad icreasig productio isurace which has the ifluece coefficiet that coefficiet ifluece of isurace is the most importat sig of ecoomical ad cultural developmet i the world could have developmet through isurace idustry expasio.i order to measure the performace ad efficiecy of stock exchage compaies, Fama ad Fritch (1995) opeed a ew door i the field of researches o efficiecy ad performace measuremet of compaies (CAPM) by addig the two variables compay size ad ratio of book value to stock market value together with fixig the weakesses of ratig model of capital assets [7]. I order to measure the performace of markets ad ecoomic savigs ad efficiet use of limited resources, professioal bodies i coutries, ad eve as cotietal, are actively researchig. I order to decrease the average costs of productio, itegratio beefits ad combiig the compaies have always bee cosidered by ecoomic maagers ad policy makers. Oe of the several effective factors i performace of compaies ad macro ecoomy is the size of active compaies i each idustry. I case of isurace compay, i the preset research we are to itroduce the best structure from the viewpoit of size ad volume of the isurace compay, which has the best performace ad efficiecy for realizig the performace of isurace market ad developmet of isurace idustry. Regardig the lowess of output ad efficiecy of isurace compaies i Azerbaija ad lack of developmet i life isurace ad may difficulties that isurace compaies are egaged i, the preset research ad researches about efficiecy ad yield of isurace compaies ca serve ad guide ivestors, supervisors, ad decisio makers o ecoomic macro policies. Sice cetral isurace i Azerbaija ' s isurace supervisio brach of ecoomical orgaizatio as a supervisor, istitute directly itervees o the logic of act of establishmets ad activities ad capitals of isurace compaies, the preset research ca be used as a ecessity ad urgecy. This research will be cotiued i five sectios as follows: 1.Subject literature 2. Methods of efficiecy measuremet 3.Research methodology 1 Correspodig author

4.Testig ad aalyzig the assumptios of research 5. Coclusio ad proposals. SUBJECT LITERATURE Theoretical Foudatios of the Research Usig itegratio ad combiatio of compaies ad developmet of activities of compaies at iteratioal level i order to icrease the yield ad efficiecy have always bee cosidered. Through itegratio ad reewig the structure, try to icrease fiacial power ad decrease their costs i order to be active i a optimized maer.upo ecoutrig the partial Competetio coditios ad moopoly, what reactio do the compaies show themselves ad what effect this will have o their efficiecy ad yield. The preset research is to aswer this importat priciple: Ejoyig what size ad what volume of capitals do commercial isuraces i Azerbaija take the advatage of efficiecy ad are active at optimized level of scale ad if, ecoomical coditios ad market capacity will allow this task or ot? I additio, whether the share which is more tha local market will have more efficiecy or ot? Research Backgroud Comiz Teiso ad Weis studied the relatioship amog itegratio ad owerships ad efficiecy ad scale savigs of life isuraces i America durig the years 1995-1998. Results from their research showed that compaies that have etered i itegratio ad bear large sizes were efficiet ad ejoyed scale efficiecies [4].I 2003, David Kamis ad Mary Weis evaluated techical efficiecies of America isuraces. They studies the compaies i three sizes of small, average ad large. Results showed that large compaies ejoyed more techical efficiecies tha small oes[2].fa, Va Kapa ad Berai (2007) estimated the efficiecies of 14 Europea coutries. They calculated the size ad structure of market i terms of efficiecy. Their studies showed that durig the study period the size of compay ad local market share were determiig factors i efficiecy. Larger compaies ad those with more shares tha those of market teded to be deficiet[9].i 2005, Kika due to a research showed that there was positive ad sigificat relatioship betwee the size of Europea compaies ad profitablity [10].I 2005, Bokhari showed that i Eglad large compaies are i better situatios cocerig profitability ad yield[1].i 2006, Lawrece showed that the size of Australia compaies are effective i their efficiecies ad yield [10].I 2011, Haifezadeh due to a research showed that there was positive ad sigificat relatioship betwee the size of Iraia compaies ad their efficiecy [11]. Cocepts ad Methods of Measurig the I this research for researchig about isurace compaies efficiecies i Azerbaija we have used this method: data eveloped aalysis method which is oe of the most valid ad best methods i efficiecy measuremet. Data evelopmet aalysis Method Farrell (1957) is amog the persos who have worked a lot i the field of efficiecy ad he has also offered a method to evaluate it, ad later this was led to a method amed as data evelopmet aalysis. I his paper (1957) bearig the title "Measurig the Productio he has defied efficiecy of the compay as the high ratio of productio of a output to the amout of a iput". Accordig to this defiitio, Farrell has also described differet kids of efficiecies as follows [8]:1. Techical efficiecy (offers the efficiecy of a compay i gaiig maximum amout of output from a give set of iputs). 2. Allocative efficiecy (was defied as the ratio of ecoomic efficiecy to techical efficiecy). 3. Ecoomic efficiecy (was defied as the ratio of the least possible expese to the existet expese).i order to evaluate the efficiecy differet methods has bee offered by researchers ad they may be classified ito two groups of: Parametric Methods No parametric Methods Data evelopmet aalysis Method may be itroduced as oe of o-parametric methods. I this method, usig techiques of liear plaig cosidered uits are evaluated. The Paper (CCR) that was published by Chares, Cooper & Rhodes (1978) i 1978 itroduced the DEA (Data Evelopmet Aalysis) method for the first time. This is oe of the most importat oparametric methods for measurig the efficiecy i which the efficiet boudary is experimetally estimated based o available iformatio..i additio, sice i attaiig the boarder fuctio, all data is give developmetally it is called data evelopmet aalysis. I order to measure the efficiecy by DEA - a computer software amed DEAP is used which is based o iput for productio ad Idia J.Sci.Res. 7 (1): 114-120, 2014

X1 ad X2 variables, as well as output Y. Techical efficiecy graph i the state of the two (X1 ad X2) iputs ad a output (Y) is show i figure oe. Figure 1: Techical i the State of Two Iputs ad Oe Output Cocerig Z Compay I figure 1 the poits located o the curve will offer equality of SS'' of techical efficiecy if a compay uses certai amouts of iputs (specified o poit P) to produce a output uit. Techical o-efficiecy of the compay is show by distace QP. I percet terms, the ratio QP/OP shows techical efficiecy ad it ca be reduced without reductio i productio. Accordig to Farrell's defiitio, techical efficiecy is measured by the ratio TE=QP/OP which is a amout betwee 0 ad 1. I geeral, techical efficiecy (meaig beig located o similar productio curve (SS'), specialized efficiecy (meaig beig located o the lie of productio expese (AA'), ad ecoomic efficiecy are obtaied o the taget poit of similar productio curve (SS') ad similar lie (AA'). INPUTS AND OUTPUTS I most studies that have bee doe o efficiecy ad earigs scale labor force ad fixed assets of the compaies have bee used as iputs, such as Deaco s study (2001), ad i some studies more iputs have bee used [6]. For example, i their studies, Toe kaoru, sahoo, & Biresh (2005) have used the busiess, borrowed capital, labor force, ad shareholders' capitals services as outputs. However, i most of the studies labor force ad fixed assets have bee used as the mai iputs [12]. (The preset research uses data evelopmet aalysis method to calculate efficiecy ad earigs scale of isurace compaies). I additio, iputs, assets, shareholders' rights, isurer expeses, ad outputs icludig isurer's eared ad ivestmet eared, ad added value, which are computed as the followig, have bee used: Added value = eared premiums + icome due to ivestmet payable commissio claims ad expeses of isurers RESEARCH METHODOLOGY From the viewpoit of purposes, this research is a applied oe because it has studied the relatioships betwee variables ad isurace market ad is to state the relatios ad offer strategies to icrease the efficiecy of isurace compaies i market. This is a descriptive research ad ejoys iductive approach ad it uses of survey method for collectig ad measurig the iformatio o the basis of iputs ad outputs data. Also, have bee used descriptive methods for describig the model (Data Evelopmet Aalysis Method).Its time domai is all of active isurace compaies i Azerbaija at the level of isurace market i the years begiig from 2009-2010 that have gaied activity certificates from the Azerbaijais departmet of isurace supervisio. Model variables I this research iclude iput ad output variables that iput variables cosist of assets, labor forces ad isurer expeses ad outputs icludes isurers eared ad added value. Research software I order to measure performace ad estimatig several umbers of parameters of productio has bee used from a computer software (DEAP) versio2.1 which is provided by Tom Coelli from New Eglad Uiversity with fixed output assumptio [3]. RESEARCH MODEL The measuremet method of Techical ad scale efficiecy I order to measure the performace ad estimatig the parameter of several umber of productio fuctio is used mathematical model i phase eviromet which was completed i 1978 by Chares, Cooper & Rhodes ad became kow as the CCR model, the performace assessmet idex, each decisio maker uit is same iput ad output parameters of model. For each iput or output elemets must be foud several weights till all iput ad output, coverted to a balaced iput ad output [5].If the umber of firms each of the vectors of iput xi, which icludes m iputs to the vector Idia J.Sci.Res. 7 (1): 114-120, 2014

product (service) r that y cotais s product (service) is able to covert. Liear programmig to measure the firm Mi:hp assumptio p that will be called the decisio maker uit p (DMUP) is as followig models: S.t: h p ҳi p- λjxij 0 i=1,.m - Yrp+ λjyrj 0 r=1,.s λi 0 assumptio. costat λj =1 output,2,. assumptio.variable output λj =0 I this liear model the amout of aim fuctio is hp ad coefficiet of λ j cosider as ukow which ca ear the optimum amout by solvig the lier programmig model. Hp: is the ratio betwee iput ad outputs which are betwee 0, 1. if the used amout be equal with optimum amout I this way h is equal to oe that shows the firm is efficiet. Y j is output ad X j is a vector which has k * 1 dimesio cosists of iput ad λ j is a vector which has * 1 dimesio cosists of fixed umbers. Mi: WiXi* The evaluatio method of ecoomical efficiecy Assume that our data cosists of m iput ad s out put for each oe of compaies. the j compay (,2,.) from oe iput vector m*1 vector Xi=(X1,X2,.X m)use for producig a output vector Y=(Y1,Y2,.Y s ) which X is a iput matrix m* vector ad Y is a output matrix of s* vector ad it shows variable for all compaies as model. I the first stage liear plaig will be as follows: S.t: Xi *- λjxij 0 i=1,.m λj 0 assumptio. costat output assumptio. variable output λj =1 λj =0,2,. Idia J.Sci.Res. 7 (1): 114-120, 2014

I this model wi is the product vector, s of cost ad Xi* (which ca solve by liear plaig) is the product vector s which cause miimizig the firm cost with same price Wi ad productio limit of Yi. Wi is a iput vector cost m * 1 for j compay which is equal with iput vector Xi ad Xi is the iput vector for miimizig the j compay, expeses (which solve by liear plaig) i the secod stage the ecoomic efficiecy of j compay that is the ratio of the least possible expese to the existet expese would be calculated as: CE = Wi Xi /WiXi amout is betwee 0, 1. Ecoomic efficiecy with amout 1 shows a compay which is efficiet i expeses. 1_CE shows the amout of expeses that compay ca, ot to reduce ad have the miimum amout of output. Data Gatherig Method: Data ad iformatio gatherig has take place i the library ad field forms Statistical uiverse of the preset research are 28 active compaies i2009ad 27 active compaies i2010years i Azerbaija at isurace market level, which have bee uder supervisio of Azerbaijais Departmet of isurace supervisio. I order to test the theories ad aalyze them the method of data evelopmet aalysis ad have bee used. Research Assumptios Cocerig icrease i yield ad efficiecy of isurace compaies through itegratio ad combiatio of the compaies ad regardig the shares of compaies from isurace market, two assumptios take place based o the purposes of the research, which are as follows: 1.Isurace compaies with large sizes have higher yield ad efficiecy compared to the isurace compaies with small ad average. 2. Compaies that more shares of market are available for them are more effective tha other compaies. Defiitio of the Mai Cocepts Used i the Research Size of the Compay Size of the compay is evaluated by differet idexes. From amog those idexes we ca poit out to asset values, sale rate ad the value of stock markets of compaies ad so o. I this research assets of the compay have bee selected as the base of isurace compaies sizes. Upo obtaiig the average value of assets of active isurace compaies i isurace market, except for the value of assets of reliace isurace ad cetral isurace, accordig to their value of assets, isurace compaies were classified ito three groups of large, average, ad small ad their efficiecies were calculated usig evelopmet aalysis of data, ad fiacial ratio (show i tables 1). Isurace Market I this reaearch the whole portfolio of commercial isurace compaies except for portfolio of reisurace compaies that are cosidered as isurace market ad the share of each compay from isurace market has bee determied as ratio of compay s portfolio to the whole portfolio of market.cosiderig the statistics ad iformatio about the Azerbaijais Departmet of isurace supervisio, that have bee extracted from fiacial statemes of isurace compaies ad isurace compaies shares of isurace market has bee determied durig the years from 2009-2010, ad regardig that o the basis of their shares of market the calculatio of average portfolio of isurace compaies have bee clssified o the basis of their shares of market ito three groups (large shares, average shares, ad small shares), the their efficiecies were calculated usig evelopmet aalysis methods (show i tables 2). Testig the Research Assumptios Usig Data evelopmet aalysis Method i Azerbaija republic Based o results from data ad iformatio aalysis usig data evelopmet aalysis method that has bee collected usig DEAP software ad show i tables 1 ad 2, it became clear that isurace compaies with large sizes are more efficiet tha other compaies. I additio, it became clear that compaies with more shares tha that of market are more efficiet tha other oes. So, both assumptios of the research: 1. Isurace compaies with large sizes ejoy higher efficiecy ad yield tha isurace compaies with small ad average sizes. 2. Compaies with larger shares tha that of market are more efficiet tha other compaies are approved. Idia J.Sci.Res. 7 (1): 114-120, 2014

Table 1: Average Compariso of Isurace Compaies i 2009-2010 (separately) 1. Isurace compaies with large sizes 2. Isurace compaies with Average 3. Isurace compaies with small sizes Isurace compaies with small sizes Ecoomic Techical Isurace compaies with Average sizes Ecoomic Techical Isurace compaies with large sizes Ecoomic Techical.64.41.38.87.54.47.77.75.67 Source: research calculatio Table 2: Average Compariso of Isurace Compaies i 2009-2010 (separately) 1. Isurace compaies with large shares of market 2. Isurace compaies with Average shares of market 3. Isurace compaies with small shares of market Isurace compaies with small shares of market isurace compaies with Average shares of market isurace compaies with large shares of market.64 Ecoomic.40 Techical The result of research with method of comprehesive aalysis of the iformatio i based o first hypothesis ad has bee show i the1ad 2 tables. The costat expeses will decrease with productio icrease ad compaies try to obtai the large share of market ad decrease productio expeses thus the first hypotheses of this research is approved. Base o the secod hypothesis should see low isurace coefficiet peetratio ad less isurace premium ad law less share of the isurace market o the base of large umber law ad beig asymmetrical iformatio i the isurace market it caused high damage ad less effective. The result of the ivestigatio i Azerbaija is equal with may ivestigatio held above..37 CONCLUSION AND PROPOSALS Accordig to studies ad obtaied results from usig methods, data evelopmet aalysis to measure efficiecy ad yield of isurace compaies it was cleared that the efficiecy of isurace compaies i Azerbaija is less ad at low level. Isurace compaies with large sizes ad more shares of isurace market ejoy more ability i relatio to cotrollig the expeses ad obtaiig the maximum outputs compared to iputs, ad this result is the same as result from may researches.85 Ecoomic.54 Source: research calculatio Techical.53.86 Ecoomic.77 Techical metioed above. To icrease the efficiecy of the compaies ad cotrollig ad decreasig expeses by compaies based o ratio output to iput we give the followig suggestios: 1. Because of less life of isurace compaies i Azerbaija the govermet must, prepare the framework of more cotrol ad supervisio of the isurace compaies, I additio, use the stadards of iteratioal associatio isurace supervisio. 2. Because of efficiecy is low ad the productio of isurace premium is less.state must be protect the isurace compaies by determie ad approvig the rule ad law of activities of isurace compaies ad do the affairs about the icreasig the capitals of isurace ad try to icrease the culture of usage from isurace services ad ecourage the people to use the isurace services. 3.Because of life of isurace compaies i Azerbaija is less ad the people have ot cofidece to isurace compaies ad drawig the value of damages or claims of them thus the state ad isurace supervisio must do more efforts about coordiatio betwee isurer ad isured ad developmet of isurace idustry. 4. It is proposed researches to be doe o liberalizatio rate ad cetralizatio i isurace market..69 Idia J.Sci.Res. 7 (1): 114-120, 2014

5. Required researches to be doe o asymmetric iformatio i isurace market. I additio, detailed studies ad researches to be doe i case of reasos for presece ad creatig asymmetric iformatio i isurace compaies ad the mode of elimiatig them. 6. Prevetig the moopoly ad cetralizatio i isurace market through establishig isurace compaies with capitals ad asset values more tha the average value of capital ad assets of isurace compaies. REFERENCES Bokhari. j, C., Hudso, R, Keasey.K. 2005,The predictive ability ad profitability of techical tradig rules: Does compay size matter? Ecoomics Letters 86.pp.21-27. Cummis, J, Mary P, Weiss, A & Hogmizi 2003, Ecoomies of scope i Fiacial services: "A DEA bootstrappig aalysis of us isurace idustry. Workig paper the Wharto school Philadelphia. Coelli, TJ, 1996, a guide to frotier versio 4.1 A Computer program for stochastic frotier Productio ad cost fuctio estimatio. CEPAWorkig paper Departmet of ecoometrics' Uiversity of New Eglad, o.7, Arm idle, Australia. Cummis, J P, Teyso, SH 8 Weiss. MA 1998, "Cosolidatio ad efficiecy i the life isurace Idustry", workig paper 98-18, Federal Reserve Bak of Philadelphia.vol. 39. No 6. Chares, A, cooper, w & Rhodes, E 1978, "measurig of decisio Makig", uit, Europea joural of operatioal Research vol.2.pp.429-44. Diaco, s 2001, the efficiecy of UK geeral isurace compaies CRIS Discussio paper series.iii, Ceter for Risk ad Isurace studies, uiversity of Nothighom.Ulc. Fama E.E. ad Frech, k.k,1995, size ad book-to -market factors i earig 7. ad returs. Joural of fiace 50, pp.131-155. Farrell, Mj 1957, "the measuremet of productive efficiecy." Joural of Royal Statistical society, series A, Cox, part B, pp 253-90. Fe, P, Vecappa, D, Diaco, S, Klumpes, P, O, Brie.2007,"Market Structure ad the of Europea Isurace Compaies" joural of Bakig Fiacig. Lawrece, D.Diewert.W&Fox.K. 2006,The cotributios of productivity, Deis. Jourals prod Aal 26: pp1-13 Latif Haifehzadeh, 2011, Market Structures ad Efficiecies of Isurace Compaies i Ira, quarterly isurace techology, cetral isurace istitute, Middle-East Joural of Scietific Research 9 (5): 675-681, 2011. Toe, K. ad B.K. Sahoo, 2005, Evaluatig cost efficiecy ad Returs to scale i the life isurace corporatio of Idia Usig Data Evelopmet Aalysis, Seio Ecoomic Plaig Sci, 3(4): 261-85. Idia J.Sci.Res. 7 (1): 114-120, 2014