Efficiency measurement and efficiency's convergence in the European insurance markets

Abstract

This thesis examines cost, revenue, and profit efficiency of the European life and non-life insurance firms operating in 22 and 24 European countries for the period 2006-2014 by employing the stochastic frontier approach. Then, β- convergence and σ-convergence criteria are examined for the period 2008-2014 in order to examine if convergence in EU has been achieved. We found that there have been significant improvement potentials. For the non-life European insurance sector we found that the average cost, revenue and profit efficiencies for the whole period were 0.836, 0.771, and 0.828 respectively. For the life sector the respective scores were 0.772, 0.792, and 0.881 respectively. Concerning efficiency convergence, for the non-life European insurance sector we found evidence of beta convergence for cost, revenue, and profit efficiencies but no evidence of sigma convergence. For the life European insurance markets we found evidence of beta and sigma convergence concerning cost and revenue efficiencies but no evidence of beta or sigma convergence for its profit efficiency. This thesis, one of the first to include a very large sample of countries and firms, extends the existing literature in two important aspects. First, it is the only study that provides cost, revenue, and profit efficiency estimates for a sample of insurers operating both in old and in new European countries that entered European Union after the so-called Fifth Enlargement Part II (in 2006), based on a flexible stochastic frontier. Second, we consider the level of convergence of the European insurance industry by estimating β-convergence and σ-convergence. To our knowledge, no other study has examined the efficiency convergence of the European insurance industry.