SESSION 19. Performance measurement in the insurance industry

19. Performance measurement in the insurance industry.

María Rubio-Misas (Universidad de Málaga).


The aim of this session is to provide an international forum for discussing current issues related to the performance measurement in the insurance industry. Papers presented at this research meeting will use frontier methodologies and other innovative techniques in order to test hypotheses and assess present-day performance questions for insurance firms.


Paper 1

Bancassurance and the Convergence of Financial Services Markets: Evidence from the Spanish Insurance Industry.

J. David Cummins (Temple University)
María Rubio-Misas (Universidad de Málaga)
Mary A. Weiss (Temple University)

Objectives, Methodology and Data
During the last two decades, bancassurance has become a key distribution channel in many insurance markets. The prevalence of this system is most pronounced in Southern Europe, but its use has also spread to other regions, particularly emerging countries. In Europe, Spain is a prominent example of the bancassurance phenomenon along with France and Italy. Banks represent the leading distribution channel for life insurance products and have been so for at least the last twenty years (Swiss Re, 2007; DGSFP, 2017). The primary purpose of this paper is to provide new evidence on the effects of convergence of financial services markets by analyzing the determinants of efficiency in the Spanish insurance industry over the post-deregulation period 1998-2012. Because profit maximization is the objective of the firm in micro-economic theory, this analysis estimates profit efficiency as well as cost and revenue efficiency. Profit efficiency indicates the net importance of the cost and revenue effects. In this paper, we investigate three sets of hypotheses relating to bancassurance and the integration of financial services markets: The first set of hypotheses relates to the effects of convergence of financial services markets. Specifically, we investigate whether the use of bancassurance, i.e., the bank distribution channel, significantly improves cost and profit efficiency of Spanish insurers or affects the prices of insurance products. The second set of hypotheses has to do with foreign entrants, i.e., are foreign entrants more efficient than domestic firms or is there a “liability of foreignness” that degrades their performance? The third set of hypotheses has to do with ownership type, i.e., does ownership type affect bank efficiency and performance? Seven ownership types are investigated including ownership by banks, insurance groups, foreign firms, and nonfinancial domestic firms. We investigate efficiency by using data envelopment analysis (DEA) to estimate “best practice” cost, revenue, and profit frontiers for each year of the sample period (see Cooper, Seiford and Tone, 2007). DEA is a non-parametric approach that does not require assumptions about the functional form of the cost, revenue, and profit function. The efficiency of each firm is measured by computing its distance from the frontiers. Cost and revenue efficiency range from 0 to 1, with a firm operating on the frontier (efficiency of 1) measured as fully efficient, whereas profit efficiency is not constrained between 0 and 1. In a second stage, efficiency scores are regressed on variables used to test the hypotheses such as the most important ownership types of Spanish insurers and variables representing the different distribution systems used by Spanish insurers. Various control variables also are included in the regressions. This two-stage procedure is demonstrated by Banker and Natarajan (2008) to yield consistent estimates of the impact of contextual variables on efficiency. In line with most recent insurance efficiency literature, we use a modified version of the value-added approach to define insurance outputs (Cummins and Weiss, 2013). The principal database for our study consists of balance sheets and income statements for all insurers operating in the Spanish insurance market over the period 1998 to 2012. The data are obtained from the annual financial statements filed by insurers with the Spanish regulatory authority, the Dirección General de Seguros y Fondo de Pensiones (DGSFP), Ministerio de Economía y 2 Competitividad. Ownership type data are obtained from the annual report on total premium ranking published in Actualidad Aseguradora (INESE). Supplementary data on prices, wages, and interest rates are obtained from other Spanish governmental sources.


Paper 2

Life and Non-life Mexican Insurers Response to the Low Interest Rates Environment.

Hugo Fuentes, José Manuel Núñez
Ana María Reyna

Operating earnings and investment yields of technical reserves are the two main sources of insurers’ income. For its part, investment return contributes to maintaining the minimum amount of capital demanded by statutory regulations and is also a cushion against unexpected increases in claims. In the past, when investment return was higher than expected, it increased profit or allowed more operating costs. Hence, after a continuous declining of interest rates, insurers had to take actions to recover their margins. The purpose of this research is to examine whether life and non-life insurers, examined as independent groups, improved their economic performance as a reaction to the prolonged period of low-interest rates. In a first stage, the performance measure of insurance companies is estimated by applying Data envelopment analysis from 1997 through 2016. Then, estimates of efficiency are regressed on macroeconomic variables and firm-specific characteristics. Results lead to conclude there is a negative relationship between efficiency and interest rate. Life group response was higher and quicker than non-life and mixed companies, as was expected since this group is more affected by interest rate changes. However, regarding the results, it seems that active managers on the insurance companies, in a lowinterest rate environment transfer, to some extent, the inefficiency to the customer through higher prices, and in a high-interest rate environment they ran the company with higher costs.

Keywords: Low-interest rates, insurance, two-stage DEA.


Paper 3

Utilization of Input Factors in the German Non-Life Insurance Industry*.

Martin Eling, Martin Lehmann
Philipp Schaper

Motivation and research questions:
Cummins and Nini (2002) investigate the large increase of equity capital in the U.S. propertyliability insurance industry during the 1990s and find that insurers significantly over-utilized equity capital compared to how much equity capital they should be using based on efficiency analysis. They also document that insurers over-utilize labor, capital and business services. One of the central results is that the use of equity capital is inefficient and not a rational response to market conditions. In a recent study, Biener and Rubio-Misas (2018) document that also European non-life insurers significantly over-utilize equity capital, as well as debt capital and labor and business services considering the post-deregulation period 2002–2012. They document that European insurance markets are not homogeneous with regard to the technology applied. They also find that the over-utilization of equity and debt capital as well as labor and business services has become even more pronounced over time. The aim of this paper is to analyze the input utilization of insurance companies in a large historical dataset which exhibits less heterogeneity than the European or US dataset considered so far. To do so we analyze the input utilization in the German non-life insurance industry in a newly constructed sample of firm-level data over the period 1954 to 2016. The extremely long sample period allows us to analyze unrevealed questions regarding input utilization in the insurance industry. Especially, it allows analyzing the impact of the business environment and major business challenges (i.e., regulation, capital market and competition) on the utilization of inputs. Given the recent trends towards market consolidation, one might expect a reduction in the over-utilization of input factors over time, which however needs to be revealed empirically. Our paper contributes to the ongoing debate of utilization of equity capital and labor in a competitive market environment (e.g., Cummins & Nini, 2002; Biener & Rubio-Misas, 2018). We employ frontier efficiency methodologies, which analyze efficiency based on a benchmark mechanism that compares firms against a best-in-class firm (or firms). These efficiency methodologies also allow us to determine the optimal mix of business inputs to produce a given amount of outputs in comparison to the best-in-class firm(s). The unusual long time period considered in our analysis also allows us to assess the impact of major changes in the business environment such as the European-wide deregulation of insurance markets. In addition to the unusual long period, the sample has two central advantages. First, it considers the actual number of employees, information that is usually not available for efficiency studies. Having this information available is especially interesting, as both Cummins and Nini (2002) and Biener and Rubio-Misas (2018) proxy that insurers could reduce labor by 61.5 % and labor and business services by 97 %, respectively. In addition, the data allows us to differentiate between the business activities and group affiliations of the non-life insurers.

Data, variables, and methodology:
We obtain annual firm-level data for German non-life insurers (excluding health insur 3 for the complete sample period (Biener, Eling, & Wirfs, 2016). The intermediation output 2 ( ) y is represented by the total investments value. The third service output is not modelled separately because it is highly correlated with the two other output variables (Eling & Luhnen, 2010). Methodology: We use a two-stage data envelopment analysis (DEA) procedure to analyze the input utilization following Cummins and Nini (2002). In a first stage, we determine the optimal input utilization among all firms on an annual basis and compare it with the actual input utilization of each insurer. Then, we use second-stage regressions to analyze various factors for firm-specific over and underutilization. In our analyses, we control for the different business activities of the insurers.


Paper 4

Executive board composition and insurer performance: International evidence.

Ana Isabel González-Fernández (Universidad de Málaga)
María Rubio-Misas (Universidad de Málaga)

The recent financial crisis has revealed the importance of corporate governance quality in the insurance industry, particularly how this quality affects insurers’ performance. However, academics papers that evaluate this quality and its effect on the insurer performance are scarce and focus on the US insurers (see e.g. He y Sommer, 2011; He et al., 2011, Huang et al., 2011; Eckles et al, 2011; Milidonis and Stathopoulos, 2011; Cole et al., 2011, Cheng et al., 2015). Besides, to the best of our knowledge, there are not empirical studies that analyze certain aspect of corporate governance such as the demographic characteristics of the board of directors. This study contributes to the insurance literature on corporate governance by analyzing the demographic characteristics of the board of directors of the insurance companies and their impact on the performance. More precisely, we evaluate how the gender, the level of studies of the members of corporate board, the dominance of inside vs. outside directors, the country of origin as well as other characteristics of the board affect the risk assumed by the insurance company. Therefore, the contribution of this paper to the literature results for being the first in analyzing the effects of these corporate governance aspects on the performance of insurers. Nevertheless, there are previous studies in other industries like banking on how characteristics of the members of the board of directors condition the process of corporate decision-making (see e.g. Berger et al., 2014).


Paper 5

Is the Digital Revolution transforming the Insurance Industry?.

Hugo Fuentes
Ana María Reyna

Several studies have found a low and slow progress of productivity in the Insurance Industry all over the world. The literature says that technology changes do not improve insurance operations as it is in other industries because many aspects of their service are provided mainly by humans. Reductions of costs, the growth of revenue and improvement of asset utilization are being observed in other industries where digitalization is embraced. In the insurance market, Insur Techs are changing the way insurance is distributed, underwritten and processed. But, not all this new companies have become a success, it seems that the disruption in this market is not a smooth journey. On the other hand, world insurance leaders are investing in technology to adapt themselves to the new environment. Is it possible that digitalization, with state of the art technologies, is shifting the production frontier of the Insurance Industry? This research reviews how digitalization is transforming the traditional business model, and applying DEA; we examine economic performance changes of Insur Techs and companies with important investments in technology.

Keywords: Insurance, innovation, digital revolution, Insur Tech, productivity, efficiency, DEA