Estimating and Analyzing The Effect of Firm Specific Characteristics on Dynamic Productivity of Insurance Firms
Compared to slow growth for insurance premium in developed countries growth in emerging markets for 2016-17 is expected to be around 10.7% for life and 8.3% for non-life. India is one of the strongest nations in the emerging market that has registered a growth in premium in 2016 7.8 % for life and 8.1% for non-life insurance SwissRe, 2016). For India, recent government policies toward financial liberalization, pro-growth structural reforms, rising personal income, and increased expenditure in infrastructural development are expected to attract more foreign domestic investments into the insurance market. High investment opportunities in India will attract more international insurance firms raising competition in the insurance business. The insurance customers are expected to demand more customized and sophisticated risk products and services from its providers. In this background it is important to analyze the productive efficiency and profitability of the Indian insurance industry which is expected to draw huge foreign capital investment after government’s new liberalization policy introduced in 2015. The empirical study measures productive efficiency and total factor productivity of insurance firms using data envelopment analysis and uses a truncated fixed effect regression model estimate the effect of firm specific characteristics and macroeconomic variables on productivity. The study uses a seven-year panel data for 14 life and 18 non-life insurance firms. The production function uses two outputs: net premium earned and income from investment; five inputs: net claims incurred, operating expenditure, equity capital, total investments, and fixed assets. The regression analysis uses scale efficiency and pure technical efficiency derived from the DEA model as dependent variables and the firm specific characteristics and macroeconomic variables as explanatory variables. Firm level characteristics to be used are claims ratio, market share, distribution ratio, solvency ratio, liquidity ration and macroeconomic variables are per capita GDP growth, inflation, and government expenditures as explanatory variables. From the productivity analysis it is expected that most of the firms are operating either at a higher efficiency level or have registered a significant productivity growth over the study period. Most of the firm specific variables are expected to have a strong and significant effect on scale efficiency and pure technical efficiency however the impacts of macroeconomic variables are unpredictable and may display mixed signs due the short time- series component of the data. According to my knowledge there are very few studies published in the literature used panel data for both life and non-life insurance firms operating in India. The results from this study would be valuable to the consumers, firm managers, and the regulatory authorities making informed decisions for policy implementation. The current study contributes to the body of the existing literature and provides valuable information to the stakeholders.
Keyword- Productivity, Efficiency, Life Insurance, Non-life Insurance, Regression, DEA
JEL Code: G14, G22, C14