Productivity and Technical Efficiency in the Italian Insurance Industry

The purpose of this paper is to partially fill the gap in the existing literature by conducting an analysis of technical efficiency and productivity growth in the Italian insurance industry. The analysis makes use of a detailed data base on Italian life and non-life insurance companies over the period 1985-1993, provided by the Associazione Nazaionale fra le Impress Assicurazioni, the association of insurance companies. The authors measure technical efficiency, changes in technical efficiency over time, and technical changes over time for a sample of Italian insurers, and use the results to test hypotheses regarding industrial organization and to analyze trends associated with structural developments in the market. Data development analysis (DEA) is used to estimate product frontiers for each year of the sample. A production frontier gives the minimum inputs required to produce any given output vector. An important reason for conducting the analysis presented is to provide benchmark statistics to facilitate comparisons of efficiency and productivity under the new European regulatory regime when data on more recent periods become available. In addition, the production frontier results are used to test hypotheses about two major issues in industrial organization - the coexistence of alternative product distribution systems, and organizational forms in an industry. The results indicated that technical efficiency in the Italian insurance industry ranged from 70 to 78 percent during the sample period. There was almost no efficiency change over the sample period. However, productivity declined significantly over the sample period, with a cumulative decline of about 25 percent. The decline was attributable almost exclusively to technological regress, implying that insurers needed more inputs to produce their outputs at the end of the sample period that they did at the beginning. Although improvement in both technical efficiency and technical change appear to be needed, the main problem at present appears to be the adverse shift in the production frontier. Although the sources of the technical regress characterizing the Italian industry are not entirely clear, this phenomenon has been observed in at least one other financial services industry that experienced deregulation and growth in new products and distribution systems - the Spanish savings banks. In a dynamically changing environment, many insurers may be adopting new approaches to producing their outputs. This provides more opportunities for firms to make mistakes in the choice of technology, perhaps leading to excessive consumption of inputs even by "best practice" firms. An increase in the complexity of insurance products and markets could have a similar effect. As firms become more experienced at operating in the new environment and the initial false-starts in the adoption of new technology have been corrected, the productivity of the Italian insurance industry can be expected to improve. The increase in competition resulting from deregulation should reinforce this process, as firms that fail to improve are likely to be penalized the by the market.