The purpose of this paper is to examine the empirical effect of competition on cost and profit efficiency in the South African non-life insurance market in a three-stage analysis.
Using annual firm level data on 80 non-life insurance companies from 2007 to 2012, the authors first employ the stochastic frontier analysis (SFA) to estimate cost and profit efficiency scores. In the second stage, the authors measure insurance market competition using the Panzar-Rosse (P-R) H-statistics. In the final stage, the authors estimate a fixed-effects panel regression model which controls for heteroskedasticity to examine the effect of competition on the estimated efficiency scores. Firm size, diversification, age, risk, reinsurance and leverage are employed as control variables.
From the SFA, the authors find average cost and profit efficiency of 80.08 and 45.71 per cent, respectively. This suggests that non-life insurers have high levels of efficiency in cost and low efficiency in profit. The annual estimates of the P-R H-statistics also suggest that firms in the market earn revenues under conditions of monopolistic competition. The authors find a positive effect of competition on cost and profit efficiency to validate the “quiet-life” hypothesis which posits that competition improves efficiency.
Regulatory policies should be directed towards enhancing competition to improve on the low profit earning potential of firms in the non-life market.
To the best of the authors’ knowledge, this study presents the first application of a non-structural measure of competition to examine the empirical relationship between competition and efficiency in insurance markets.
The authors are very grateful for the constructive comments from two anonymous reviewers. The authors also acknowledge insightful comments from participants at the 11th African Finance Journal Conference, 14th-15th May 2014 in Durban, South Africa where an earlier draft titled “Cost and profit efficiency in insurance markets: evidence on competition effects in South Africa” was presented. All remaining errors are the responsibility of the authors.
Alhassan, A. and Biekpe, N. (2016), "Competition and efficiency in the non-life insurance market in South Africa", Journal of Economic Studies, Vol. 43 No. 6, pp. 882-909. https://doi.org/10.1108/JES-07-2015-0128Download as .RIS
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