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A Comparison of DEA and SFA Approaches: Application to the US Non-Life Insurance Market

Author

Listed:
  • Suarez-Fernandez, Sara

    (Faculty of Economics and Business, University of Oviedo, Spain)

  • Quiroga-Garcia, Raquel

    (Faculty of Economics and Business, University of Oviedo, Spain)

  • Manzano-Perez, Isabel

    (Faculty of Economics and Business, University of Oviedo, Spain)

Abstract

Analyzing the efficiency of markets is essential for both business managers and policymakers. On the one hand, private companies need to be as efficient as possible, given that their competitiveness and their chance of survival depend on it. On the other hand, public enterprises declare to be committed to using public funds in the best possible way. To be competitive, firms need to improve their performance by incorporating the benchmark practices of their field in their management and studying efficiency levels may help identify potential areas for development. However, does the efficiency score depend on the method chosen to calculate it? In this paper, our aim is to compare the rate of agreement between two different approaches to measure efficiency, the parametric and the non-parametric. For the parametric procedure, we use stochastic frontier analysis (SFA), while in the case of the non-parametric, we use data envelopment analysis (DEA) and the dynamic approach of the DEA, the window DEA. To do so, we analyze 923 non-life (property/casualty) US insurance companies in the period 2007–2011. According to our results, comparable efficiency scores are found using SFA and DEA methodologies. More importantly, the two approaches rank companies in a similar order, mostly agreeing on which are the most and the least efficient firms. Therefore, we support that the approaches can be used complementarily.

Suggested Citation

  • Suarez-Fernandez, Sara & Quiroga-Garcia, Raquel & Manzano-Perez, Isabel, 2021. "A Comparison of DEA and SFA Approaches: Application to the US Non-Life Insurance Market," Asian Journal of Applied Economics/ Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 28(2), pages 107-127, December.
    • Handle: RePEc:ris:apecjn:0062
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    More about this item

    Keywords

    DEA; Window DEA; SFA; insurance market; efficiency;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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