ساختار بازار و بهره وری شرکت های بیمه اروپا: تجزیه و تحلیل مرزی تصادفی

This paper is motivated by the progressive liberalisation of the European insurance market in recent years. It uses stochastic frontier analysis to estimate Flexible Fourier cost functions for European insurance companies. Separate frontiers are estimated for life, non-life and composite companies. We adopt a maximum likelihood approach to estimation in which the variance of both one-sided and two-sided error terms is modelled jointly with the frontiers. This approach allows us to simultaneously control for the impact of heteroskedasticity on the estimation of scale economies as well as estimating the effect of firm size and market structure on X-inefficiency. The study draws on Standard & Poor’s Eurothesys data set of financial reports for the period 1995 to 2001. This provides technical and non-technical accounts at year-end for life, non-life and composite insurance businesses in 14 major European countries. Our estimates suggest that over this period most European insurers were operating under conditions of decreasing costs (increasing returns to scale), and that company size and domestic market share were significant factors determining X-inefficiency. Larger firms, and those with high market shares, tend to have higher levels of cost inefficiency.

There is a growing interest and concern about the international competitiveness and efficiency of European financial institutions in general and insurance companies in particular. Over the past 15 years the European Union has gradually deregulated the financial services sector through a series of banking and insurance directives with a view to creating a single European market in financial services. For the first time, true price and product competition in both life and non-life insurance were introduced in European retail insurance markets.1 The directives implemented the concept of the “single passport” whereby, from 1994, an insurer can do business in all EU countries provided that it is licensed in one EU country. The consequence of deregulation has been an unprecedented wave of mergers and acquisitions (M&As) of European financial institutions. From 1990 to 2002 there were 2595 M&As involving European insurers of which 1669 resulted in a change in control.2 The presumption behind the creation of a single market is that increased competition across national boundaries will drive down costs through reduced X-inefficiency, and consolidation through M&As will further reduce costs as a consequence of scale economies. However, a corollary of the latter is that the increasing size of companies within their national markets will permit a degree of local market power and this may have unintended consequences for efficiency.3 In spite of these dramatic changes in European financial markets, there has been little research to date on the economic impact of these developments.4 This is particularly true for the insurance market, where some of the more dynamic changes in market structure have been taking place. Rees and Kessner (2000) assess the direct effects of deregulation on the efficiency of German and British life insurance companies and find some (relatively modest) evidence which suggests that lighter regulation, competition and the risk of bankruptcy caused a significantly higher proportion of firms to achieve efficiency levels closer to those of the most efficient firms. Using DEA analysis, Cummins and Rubio-Misas (2006) find that consolidation in the Spanish insurance industry over the period 1989–1998 led to significant improvements in efficiency and to price reductions in both life and non-life insurance. Cummins and Weiss (2004) use an event study approach to identify the impact of European insurance mergers and acquisitions during the period 1990–2002 on shareholder value, and find clear gains from cross-border M&A transactions, but ambiguous results in relation to within-border transactions. The objective of this paper is to model and measure cost efficiency in the European insurance sector using stochastic frontier analysis (SFA), and to explore variations in efficiency in relation to firm size and market structure. A principal advantage of SFA in the estimation of cost frontiers lies in its potential to discriminate between measurement error (“two-sided” error) and systematic inefficiencies (“one-sided” error) in the estimation process. However, the means by which this is achieved is inevitably sensitive to distributional assumptions, both in relation to the frontier itself and the stochastic nature of the error terms. We address these issues in two ways. The functional form assumed in our estimation is the Flexible Fourier, which has been shown to be particularly suitable where the size distribution of firms is highly skewed towards large numbers of small units. Second, we recognise the potential for estimation bias due to heteroskedasticity in both the one- and two-sided errors by modelling these explicitly as functions of firm size and market share (see Kumbhakar and Lovell, 2000). This simultaneously addresses the frontier estimation bias due to heteroskedasticity5 and measures systematic variations in efficiency due to size and dominance. This approach has considerable advantages over the more usual approach to estimating the impact of exogenous influences on (in)efficiency, in which the efficiency scores are used as dependent variables in a second stage regression. We apply this methodology using a panel from Standard’s & Poor’s Eurothesys data set for the period 1995 to 2001, consisting of year end technical, non-technical and balance sheet accounts from insurance businesses in 14 major European countries. Separate frontiers are estimated for life, non-life and composite firms. Efficiency scores are obtained and scale economies estimated. This paper is structured as follows. Section 2 reviews hypotheses relating to the impact of competition and market structure on efficiency. Section 3 discusses the methodology behind estimation. Section 4 describes the data and Section 5 discusses the results. A concluding section follows.

This paper uses a stochastic frontier methodology to model the efficiency of European insurance companies between 1995 and 2001. We estimate flexible form frontiers for the three main business types observed in the EU: life and non-life specialists, and composite companies which produce both type of insurance product. We have estimated a common functional form (i.e. “shape”) for the European frontier, but then allowed for parallel shifts in this frontier across different countries and over different years. We adopt a one-stage approach to estimation that simultaneously controls for the effect of size and market share on X-efficiency, and also corrects for the potential estimation bias arising from heteroskedastic error terms. The estimated frontiers are then used to explore the scale economies under which European insurance companies are operating, and to compare these with the estimated cost efficiency scores. We believe that this study is one of the first to explore these issues in the enlarged European Union - an insurance market with the potential for true price and product competition. The international perspective allows us to take advantage of national as well as temporal variation in input prices – and to explore the impact of differences in local market shares. We find strong evidence that the X-inefficiency of specialist insurers increases with firm size and (to a lesser extent) domestic market share. By contrast the degree of X-inefficiency for composite firms appears to be low, and to vary little with size. If anything, the mean degree of X-inefficiency seems to have increased over time, particularly for life specialists, possibly as a reflection of the growth in firm size over the period. Most significantly, our results show that increasing returns to scale are typical for the great majority of EU insurance companies. These returns to scale were observed across all asset classes and all types of business. One inference that may be drawn from this is that European insurance companies have been able to take advantage of returns to scale throughout this period, and the observed increase in firm size and market concentration has been a consequence of this. Mergers and acquisitions have been facilitated by the liberalized EU market, and encouraged by the fact that scale in the insurance sector has become a source of efficiency gain which potentially dwarfs all others. The trade-off with increased X-inefficiency is clearly a constraint on this incentive to grow. However, it is important to bear in mind that we have used company level data in this paper, and that one feature of the emerging European insurance market has been the growth of consolidated groups across Europe which bind together companies which might be life or non-life specialists, or even composites operating within a group structure. These groups exist alongside independent companies of all types which of course have access to both domestic and European markets. The importance of this distinction is to emphasise that consolidation in Europe through acquisition at group level may be in part a response to the scale and efficiency trade-offs at the company level which have been reported in this paper.