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Efficiency and Profitability in Thailand’s Life Insurance Industry: A Cost Frontier Function and Hausman test, 1997-2002

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  • Karim, M.Z.A.
  • Jhantasana, Ch.

Abstract

Liberalized environments brought about by trade agreements and other restructuring of international markets under the General Agreement on Trade and Services (GATS) have increased market opportunities for foreign firms. This opening up of domestic market under GATS will cause the inflow of foreign insurance firm hence heighten competitive pressures. As such, insurance firm in Thailand need to be efficient to ensure their survival. Hence, the purpose of this paper is to evaluate the cost efficiency and its relationship with profitability in Thailand’s life insurance firms during the period 1997-2002 using the stochastic cost frontier approach. We find that the industry is on average 82 to 140 percent inefficient. There is no significant relationship between inefficiency and age. But, the mean inefficiency is positively correlated with size suggesting the need for rationalization in the insurance industry in Thailand. Consolidating the large number of smaller insurers should be high on the government’s agenda, and the capital requirements for life insurers need to be increase. We show that inefficiency is negatively correlated with ROE and ROA ratios. This shows that efficient firms, on average, have higher return on equity and on assets. This indicates that inefficiency has substantial effect on the profitability of life insurance companies.

Suggested Citation

  • Karim, M.Z.A. & Jhantasana, Ch., 2005. "Efficiency and Profitability in Thailand’s Life Insurance Industry: A Cost Frontier Function and Hausman test, 1997-2002," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(4), pages 19-36.
  • Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:4_2
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    File URL: http://www.usc.es/economet/reviews/ijaeqs242.pdf
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    References listed on IDEAS

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    1. Cummins, J. David & Tennyson, Sharon & Weiss, Mary A., 1999. "Consolidation and efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 325-357, February.
    2. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    3. J. Cummins & Hongmin Zi, 1998. "Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry," Journal of Productivity Analysis, Springer, vol. 10(2), pages 131-152, October.
    4. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    5. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    6. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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    Cited by:

    1. Erkoc, Taptuk Emre, 2013. "Estimating Economic Efficiencies of Public Sector Organisations with Stochastic Frontier Analysis: Evidence from Turkish Higher Education," MPRA Paper 54101, University Library of Munich, Germany.

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