Measuring Operational Efficiency of the Insurance Industry in Kenya Using Data Envelopment Analysis

Abstract

There has been ever growing concern to measure relative operational efficiency of Decision Making Units (DMU). Stochastic frontier analysis and Regression have been the most popular methods used to measure the same. This study examines the use of Data Envelopment Analysis model to determine the relative operational efficiency of insurance firms in Kenya. The model used is a multi-variable usage in terms of inputs versus outputs. The data utilized was for the period between January to December 2010. The input and output data are analyzed using Data Envelopment Analysis computer program. The objective of this study was to obtain the following information of each insurance firm: relative efficiency score, peer for each inefficient insurance firm, objective output and inputs targets, slacks outputs units and surplus inputs. Finally, relationship between relative efficiency score and to its total assets admitted is noted. The study found out that 23 of the efficient insurance firm’s average efficiency score was one (1) while 12 are inefficient with an efficiency score of 0.6848. Meanwhile, inefficiency in insurance firms in Kenya is caused by low net insurance premium earned and larger firms not utilizing assets effectively. The following recommendations are then made to the insurance industry: the 23 insurance firms should be investigated and their best practices adopted by its peers, products to be developed aimed at increasing net earned premium and finally, asset verification exercise should be done to ensure all assets are productively used and the obsolete ones disposed while excess deployed to needy insurance firms’ branches.