A cross-strait comparative study of efficiency of life insurance companies: An application of the input slack adjustment approach

Abstract

This paper applies the three-stage approach proposed by Fried et al. (2002) to analyze the efficiency of life insurance companies in the Mainland and Taiwan areas. This approach adjusts the input slacks obtained by data envelopment analysis (DEA) via the stochastic frontier analysis (SFA). Our major empirical findings are: (1) Efficiency scores of life insurance companies in both areas are significantly affected by both environmental factors and statistical noises. After input slack adjustments, the average efficiency score drops for 72.17%; (2) Compared to those companies in the Taiwan area, the life companies in the Mainland area have a large diversion in efficiency scores which range from less than 10 to 78.3%; (3) Debt equity has a significant effect to increase efficiency, indicating that increases in the market share and financial leverage ratio help promote efficiency; (4) Ownership types have different advantageous effects on different inputs. (5) The years since establishment have no significant effects on efficiency, indicating that the younger mainland Chinese life insurance companies do not have disadvantages because it is in an open and competitive market environment; (6) Under a similar environment, Taiwan-based life insurance companies are more efficient than mainland-based ones. The input slacks and managerial efficiency of life insurance companies in Taiwan and mainland China are significantly affected by environmental factors, showing that institutional reform does matter for improving the efficiency of financial institutions.