Efficiency Assessment of General Insurers in Malaysia Through Data Envelopment Analysis
Anas Fathul Ariffin1*, Amirul Aizad Abdullah1, Diana Juniza Juanis2, Muhammad Hilmi Samian2, Teoh Yeong Kin1, Mohd Halimi Ab Hamid1
1 Faculty of Computer and Mathematical Sciences, University Teknologi MARA, Perlis, Malaysia
2 Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA, Negeri Sembilan, Malaysia
*Corresponding Author: [email protected] Accepted: 15 October 2022 | Published: 1 November 2022
DOI:https://doi.org/10.55057/ajrbm.2022.4.3.54
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Abstract: This study aims to get an overview about the efficiencies of the general insurance companies operating in Malaysia. Data Envelopment Analysis (DEA) approach is used to evaluate the management efficiency and profitability of general insurers either local or foreign insurance companies for the period 2015-2018. Indeed, a two-stage approach to data envelopment analysis (2S-DEA) methodology is used to decompose the typical two-stage operating process of general insurance undertakings in a single intermediate operation. Based on the result, the companies seen not very efficient from the past four years. In addition, the general insurance companies in Malaysia shows a declining trend in their efficiencies.
However, in between local and foreign insurance companies, it seen that the foreign companies are more efficient than the local companies since it has the large range of efficient value. These findings would benefit consumers and Malaysia 's insurance societies such as insurers and policy makers.
Keywords: General insurer, Data Envelopment Analysis, general insurance, efficiency ___________________________________________________________________________
1. Introduction
Insurance is one of Malaysia's largest and most important financial services and is seen as a rising sector with substantial growth and continues to play a socio-economic role in the economy. Most insurance companies offer two types of insurances namely life insurance and general insurance. Life insurance shall only cover the loss of life under certain conditions set out in the agreement signed by the insurer and the insured. In other word, benefit under life insurance will be paid upon the death of insured. While general insurance covers other types of losses (properties losses) such as car accidents, fire and theft. In the last few years, 22 general insurers have been registered with the Central Bank of Malaysia (BNM). Among 22 companies, 12 are foreign insurers and the remaining 10 are local insurance companies. Even though Malaysia has many insurers and seems to be expanding, the General Insurance Industry recorded a 1.4% drop in gross direct premiums of RM 8.92 billion in the first six months of 2019 compared to the same period on the previous year. The dominant class of motor insurance was relatively flat with a marginal decline of 0.2% at RM 4.18 billion. Fire insurance increased by 2.5% to RM 1.73 billion (Persatuan Insurans Am Malaysia, 2019). Moreover, the biggest challenge facing the insurance industry in the future is to increase the global trend of restructuring and specialization competition from traders to build a bigger, more resilient multinational insurance business and to focus on the core competency sector. For example, the
rapid growth of competition between insurance companies in industrial and non-insurance institutions such as banks, mutual funds etc. and disruptive changes in technology insurance companies must adapt their products to gain a competitive advantage. In the competitive market, performance measurement in the insurance sector is becoming vital in contemporary business environment.
Sharew & Fentie (2018) opined that a robust insurance industry could facilitates effective capital allocation, mobilizes, channels savings, supports trade, and enhances the quality of life for people in each nation by boosting social stability through individual health insurance, life insurance, pension funds, and worker's compensation. However, from a commercial service perspective, it promotes the domestic financial sector and becomes a major player in the capital market. According to (Mehari & Aemiro, 2013), measuring insurance efficiency is mainly oriented towards an effective frontier approach. This method was widely used to assess efficiency levels, since both approaches allow multiple inputs and outputs to be used from a sample of institutions to develop an efficiency frontier and evaluate the efficiency of a Decision-Making Units (DMUs) relative to other DMUs in the sample. Therefore, this study attempts to measure the efficiency of insurance companies in Malaysia.
2. Literature Review
Kaffash & Marra (2017) stated that inputs were operating expenses and fees charged, while outputs were benefits received and net premiums paid. The study shows that India’s Life Insurance Corporation consistently achieved a cost-effectiveness score of 100% while conducting a citation network analysis of DEA with financial services companies such as banks, insurance companies, and money market funds between 1985 and 2016, identifying 59 papers that used DEA to measure the effectiveness of insurance firms. However, of the 59 DEA applications, only nine studies on the main cost-effectiveness path were reviewed and the rating was not very consistent with private life insurance companies. Moreover, Zimková (2015) evaluated the efficiency of the 13 commercial insurance companies in the Slovak Republic and assessed their super-efficiency in 2013. Among the 13 insurers, nine insurance companies became effective. In addition, a study conducted in Malaysia by Baharin & Isa (2013) used Stochastic Frontier Analysis (SFA) approach to measure the efficiency of insurance companies in Malaysia. The study used a list of 19 insurers selected for this study, including 7 takaful operators and 12 life insurance companies. The paper used financial data, including financial statements and balance sheets, from annual reports. A pooled data panel was used in the study between 2002 and 2010. The study used three inputs: energy, money, and materials. In view of the lack 10 of data on the total number of employees, the labor price is known as the ratio of the total cost of employees divided by the total resources of the company.
Another study that used SFA by Ahmad and his team (2013) also on the efficiency of insurance companies but specifically for general insurers. They found that the technical inefficiency effects associated with the production of total profits from the general insurance input are very low. Next is the study by (Faruk & Rahaman, 2015). The study compared the most effective life insurers between Malaysia and Bangladesh among 15 insurance companies. The researchers used DEA to measure the efficiency of insurance companies. Next, study by (Jaiyeoba & Haron, 2015) also used DEA to assess the performance of insurance companies in Nigeria. Results of the study show that the insurance industry in Nigeria is less efficient and that this is due to a low level of technological improvement in efficiency. A study in India by (Nandi, 2014) shows that the performance of India’s top 13 life insurance companies was analysed using DEA for the period 2002-2012. In the study, two inputs were used, which are
commission expenses paid and running expenses. The author reported that the average technical efficiency of life insurers was 82.6%, 87.5% pure technical efficiency and 94.7% in size efficiency. The efficiency of DEA for registered life insurance companies in Punjab was examined by Bawa and Bhagat in 2015 between 2006 and 2013. The study used net premiums as input, number of agents, number of offices and number of policies as output. From this, it shows that DEA is a very useful and common methods to calculate efficiency of insurance companies in each country. Moreover, (Dash & Muthyala, 2018) opined that DEA and the Stochastic Frontier Approach (SFA) are the two most common methods used to calculate efficiency.
3. Methodology
The study focuses on five local and five foreign insurance companies that operating in Malaysia. The list of these general insurers obtains from the website of the BNM. Table 1 shows the list of the selected general insurance companies to be measured in this study. In addition, data for insurers are collected from each company’s annual reports from 2014 to 2018.
Table 1: List of Selected General Insurance Companies in Malaysia
No. Name Ownership
1 AIA General Berhad Foreign
2 AIG Malaysia Insurance Berhad Foreign
3 Allianz General Insurance Company Berhad Foreign
4 AmGeneral Insurance Berhad Local
5 AXA Affin General Insurance Berhad Local
6 Etiqa General Insurance Berhad Local
7 MSIG Insurance (Malaysia) Berhad Foreign
8 RHB Insurance Berhad Local
9 Tokio Marine Insurance (Malaysia) Berhad Foreign
10 Tune Insurance Malaysia Berhad Local
Two-Stage DEA Model
Two-stage DEA analysis is used in the model to make this study more reasonable. Research conducted by Seifor and Zhu (1999) was the first study to use a two-stage DEA method to identify the largest commercial insurance company in the United States. Both phases consist of inputs and outputs for this two-stage DEA model. The intermediary will function as output in stage 1 but will act as input in stage 2. Figure 1 is a two-stage analysis of the DEA model.
Figure 1: Two-stage Analysis DEA Model
The two-stage analysis DEA model can be computed using this formula:
Let,
m : Number of inputs of DMUs.
S : Number of mediators of DMUs.
T : Number of outputs of DMUs.
zhk : hth output of the kth DMU.
zhj : hth output of the jth DMU.
yrk : rth mediator of the kth DMU.
yrj : rth mediator of the jth DMU.
xik : ith input of the kth DMU.
xij : ith input of the jth DMU.
urk : The weight for rth mediator of the kth DMU in stage 1.
vik : The weight for ith input of the kth DMU in stage 1.
u’rk : The weight for rth mediator of the kth DMU in stage 2.
whk : The weight for hth output of the kth DMU in stage 2.
𝜀 : A small positive real number; usually, ε is set to equal 10-4 or 10-6. θk(1) : The relative efficiency of the kth DMU in stage 1.
θk(2) : The relative efficiency of the kth DMU in stage 2.
θk(3) : The relative efficiency of the kth DMU in overall performances.
Propose Model
Two important things have been taken into account when assessing the efficiency and measuring the overall performance of the insurance company. According to Ozcan (2014), optimization may have an impact on efficiency. Efficiency may also be defined as the overall performance. Research by Ramli et al. (2018) states that efficiency can be defined as “doing things right.” Efficiency means the level of performance described using the least amount of input to achieve the highest output. It requires a reduction in the number of unnecessary resources used to produce a given output. The researcher shall conduct a two-stage DEA model for performance evaluation in the implementation of this project.
Figure 2: Proposal Model to Evaluate the Efficiency of Insurance Companies
Operating expenses (X1) were the first inputs, including fees, commission and management expenses. Insurance expenses (X2) were the second input for the first stage, which is related to the costs of insurance marketing, the expenses paid to numerous consultants and agents.
Outputs associated with the first stage of the proposed model; those are also inputting from stage two. The gross premium earned (Z1) was used as the first step output would become the second stage input as we can see from Figure 2. For the second stage outputs, investment income and underwriting profit were selected for this. Underwriting profit is the premium left after the losses have been paid and the elimination of operating costs and does not provide any return on investment earned on the premiums held. Efficiency of insurers can be measured
Operating Expenses(X1) Insurance Expenses(X2)
Underwriting Profit(Y1) Investment Income(Y2) Gross-Premium
Earned(Z1) Stage 1
(Premium Recovery Process)
Stage 2
(Profit Generation Process)
Efficiency
separately in two stages and summed up together to measure their overall efficiency. In this modern age, there are different methods of calculating the DEA formula instead of using the conventional approach that is manually calculated. Microsoft Excel is the perfect estimation method for measuring the output of insurance firms using the DEA model. Excel solvers, such as DEA solvers, can optimise both linear and non-linear formulation requirements. The advantage of using DEA Solver in this project is that the software can address issues of up to 200 decision units and can handle 20 inputs and outputs on a continuous basis.
4. Results and Discussions
Figure 3 shows the overall efficiency score for the ten selected general insurers in Malaysia.
Among these insurance companies, AIA General Berhad recorded the highest overall performance score of 83.03%. It means that its efficiency score has been the best for the last four years. In second place, with a score of 72.06%, is Allianz General Insurance Company Berhad, followed by AmGeneral Insurance Berhad in third place with a score of 67.53%.
Meanwhile, AXA Affin General Insurance Berhad, with 64.88%, ranks fourth. Etiqa General Insurance Berhad in fifth place with 62.27%. Next is MSIG Insurance (Malaysia) Bhd and its efficiency score is 60.20%. Then, in seventh place with 59.66% is RHB Insurance Berhad.
Next is Tokio Marine Insurance (Malaysia) Berhad with 59.24% and then from bottom two is Tune Insurance (57.62%). Finally, AIG Malaysia Insurance Berhad is only 53.18%. All efficiency scores of the selected insurance companies are above 50%, it is implied that the companies are efficient but not very effective. The most efficient companies are that companies have the highest efficiency score among the rest.
Figure 3: Graph of Overall Efficiency Scores for Ten Selected General Insurance Companies’
Table 2 shows the ranking of selected insurance companies operating in Malaysia. As can be seen, the top two are AIA General Berhad and Allianz General Insurance Company Berhad with 83.03% and 72.06% of their overall efficiency score. After that, AmGeneral Insurance Berhad is third with 67.53%, AXA Affin General Insurance Berhad is fourth and Etiqa General Insurance Berhad is fifth with 64.88% and 62.27% each. Then follow MSIG Insurance (Malaysia) Bhd in sixth place with 60.20%. While in seventh place is RHB Insurance Berhad with 59.66%, followed by Tokio Marine Insurance (Malaysia) Berhad with 59.24%.
Meanwhile, Tune Insurance Malaysia Berhad and AIG Malaysia Insurance Berhad are 57.62%
and 53.18% respectively in the ninth and tenth periods.
83.03
72.06 67.53 64.88 62.27 60.20 59.66 59.24 57.62 53.18
10.000.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00
AIA General
Berhad
Allianz General Insurance Company (Malaysia) Berhad
AmGeneral Insurance
Berhad
AXA Affin General Insurance
Berhad
Etiqa General Insurance
Berhad
MSIG Insurance (Malaysia)
Bhd
RHB Insurance
Berhad
Tokio Marine Insurance (Malaysia) Berhad
Tune Insurance Malaysia Berhad
AIG Malaysia Insurance Berhad
Efficiency(%)
Insurance Companies Overall Efficiency Score
Table 2: Overall Ranking of Insurance Companies Operating in Malaysia
Ranking Decision Making Units Ownership Overall (%)
1 AIA General Berhad Foreign 83.03
2 Allianz General Insurance Company Berhad Foreign 72.06
3 AmGeneral Insurance Berhad Local 67.53
4 AXA Affin General Insurance Berhad Local 64.88
5 Etiqa General Insurance Berhad Local 62.27
6 MSIG Insurance (Malaysia) Berhad Foreign 60.20
7 RHB Insurance Berhad Local 59.66
8 Tokio Marine Insurance (Malaysia) Berhad Foreign 59.24
9 Tune Insurance Malaysia Berhad Local 57.62
10 AIG Malaysia Insurance Berhad Foreign 53.18
5. Conclusions
In order to help customer’s select insurance companies and to compare the efficiency levels between local and foreign insurers. Therefore, the objective of this study is to measure the efficiency of insurance companies in Malaysia and to rank the most efficient insurance companies. This study shows that the most efficient insurance companies are AIA General Berhad (83.03%), followed by Allianz General Insurance Company Berhad (72.06%).
AmGeneral Insurance Berhad (67.53%) in third place. Table 3 shows the overall efficiency of local insurance companies. From the table, AmGeneral Insurance Berhad is the first ranking of local insurers among local insurance companies, as the overall efficiency score is the highest among selected local insurance companies. AmGeneral Insurance Berhad scored 67.53% of the overall efficiency score between 2015 and 2018. This is probably due to the management of the company, which focuses on both stages. Second, AXA Affin General Insurance Berhad scored 64.88%, followed by Etiqa General Insurance Berhad scored 62.27%. RHB Insurance Berhad is in fourth place with a total efficiency score of 59.66% and the last place for Tune Insurance Malaysia Berhad with a total efficiency score of 57.62%. As been shown in the result table above all the efficiency score is above 50%. The overall efficiency range of the local companies is between 50% until 70% and it a good result for the local insurance companies.
Table 3: Overall Ranking of Local Insurance Companies Operating in Malaysia
Ranking Decision Making Units Ownership Overall (%)
1 AmGeneral Insurance Berhad Local 67.53
2 AXA Affin General Insurance Berhad Local 64.88
3 Etiqa General Insurance Berhad Local 62.27
4 RHB Insurance Berhad Local 59.66
5 Tune Insurance Malaysia Berhad Local 57.62
Table 4: Overall Ranking of Foreign Insurance Companies Operating in Malaysia
Ranking Decision Making Units Ownership Overall (%)
1 AIA General Berhad Foreign 83.03
2 Allianz General Insurance Company Berhad Foreign 72.06
3 MSIG Insurance (Malaysia) Berhad Foreign 60.20
4 Tokio Marine Insurance (Malaysia) Berhad Foreign 59.24
5 AIG Malaysia Insurance Berhad Foreign 53.18
For further research, it is suggested that the researcher should try different approaches to assess the performance of insurance companies operating in Malaysia, such as the production approach or the value-added approach.
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