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Organizational Form And Efficiency: The Coexistence Of Family Takaful And Life Insurance In Malaysia

  • Norashikin Ismail

    (Senior Lecturer, UiTM Segamat, Johor, Malaysia)

  • Prof. Dr. Datuk Syed Othman Alhabshi

    (Professor of Takaful, International Centre for Education in Islamic Finance (INCEIF))

  • Prof. Obiyathulla Bacha

    (Professor of Finance, International Centre for Education in Islamic Finance (INCEIF))

After 25 years in operation, it is time that takaful industry is evaluated in terms of its performance. One of the issues that has impact on efficiency is organization form. There have been two conflicting opinions on this issue. Eling & Luhnen (2010) opined that mutual form is efficient than stock form but Brockett (2005) concluded the opposite. This paper provides an empirical study on the relationship between efficiency and organizational structure for takaful operators in Malaysian dual financial system. A sample of 19 firms is chosen over the period 2004-2009. The selection of inputs and outputs are based on flow approach consistent with Leverty and Grace (2009). The study employed non parametric approach that is Data Envelopment Analysis (DEA) with input orientation measurement to estimate the technical efficiency for both industries. This study applied constant return to scale (CRS) and variable return to scale (VRS) to separate the scale efficiency from the technical efficiency. A Mann Whitney test is employed to examine any significant difference in efficiency between takaful and insurance industry. The findings indicate that there is a significant difference in technical efficiency between takaful industry and insurance industry. It is found that takaful has lower technical efficiency than conventional insurance. Importantly, it shows the organization form has an influence on the efficiency. Finally, the study found that the conventional insurers have higher scale efficiency than takaful industry.

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Article provided by Global Research Agency in its journal Journal of Global Business and Economics.

Volume (Year): 3 (2011)
Issue (Month): 1 (July)
Pages: 122-137

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Handle: RePEc:grg:01biss:v:3:y:2011:i:1:p:122-137
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  1. Fecher, F. & Kessler, D. & Perelman, S. & Pestieau, P., . "Productive performance of the French insurance industry," CORE Discussion Papers RP -1043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. J. A. Bikker & M. van Leuvensteijn, 2008. "Competition and efficiency in the Dutch life insurance industry," Applied Economics, Taylor & Francis Journals, vol. 40(16), pages 2063-2084.
  3. Banker, Rajiv D. & Cummins, J. David & Klumpes, Paul J.M., 2010. "Performance measurement in the financial services sector: Frontier efficiency methodologies and other innovative techniques," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1413-1416, July.
  4. Hao, James C.J. & Chou, Lin-Yhi, 2005. "The estimation of efficiency for life insurance industry: The case in Taiwan," Journal of Asian Economics, Elsevier, vol. 16(5), pages 847-860, October.
  5. Patrick L. Brockett & William W. Cooper & Linda L. Golden & John J. Rousseau & Yuying Wang, 2005. "Financial Intermediary Versus Production Approach to Efficiency of Marketing Distribution Systems and Organizational Structure of Insurance Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(3), pages 393-412.
  6. Gardner, Lisa A. & Grace, Martin F., 1993. "X-Efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 497-510, April.
  7. Yao, Shujie & Han, Zhongwei & Feng, Genfu, 2007. "On technical efficiency of China's insurance industry after WTO accession," China Economic Review, Elsevier, vol. 18(1), pages 66-86.
  8. J. David Cummins & Mary A. Weiss & Hongmin Zi, 1999. "Organizational Form and Efficiency: The Coexistence of Stock and Mutual Property-Liability Insurers," Management Science, INFORMS, vol. 45(9), pages 1254-1269, September.
  9. Vivian Jeng & Gene C. Lai, 2005. "Ownership Structure, Agency Costs, Specialization, and Efficiency: Analysis of Keiretsu and Independent Insurers in the Japanese Nonlife Insurance Industry," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(1), pages 105-158.
  10. Cummins, J. David & Weiss, Mary A. & Xie, Xiaoying & Zi, Hongmin, 2010. "Economies of scope in financial services: A DEA efficiency analysis of the US insurance industry," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1525-1539, July.
  11. Martin Eling & Michael Luhnen, 2010. "Frontier Efficiency Methodologies to Measure Performance in the Insurance Industry: Overview, Systematization, and Recent Developments," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 35(2), pages 217-265, April.
  12. Kao, Chiang & Hwang, Shiuh-Nan, 2008. "Efficiency decomposition in two-stage data envelopment analysis: An application to non-life insurance companies in Taiwan," European Journal of Operational Research, Elsevier, vol. 185(1), pages 418-429, February.
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