The impact of financial liberalization on the efficiency of Philippine life insurance companies: A data envelopment analysis approach

• Main Authors: Abrillo, Anjofel Q., De Zuñiga, Mary Joy P., Tamares, John Joseph S.
• Format: text
• Language: English
• Published: Animo Repository 2006
• Subjects: Insurance, Life > Philippines; Insurance companies > Philippines; Finance > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/7560
• Institution: De La Salle University

This paper attempts to determine the impact of financial liberalization on the efficiency of Philippine life insurance companies over the thirteen-year period 1991-2003. Same with the study of Diacon (2001), we look at different measures of value-based efficiency: namely pure technical efficiency (which is concerned with the optimal use of resources to produce output), scale efficiency (the extent to which the insurer is affected by either increasing or decreasing returns to scale), and mix or technical efficiency (whether the insurer is utilizing an ideal combination of inputs and outputs). This paper estimates the best practice production frontiers, which gives the minimum inputs required to produce any given output for each year of the sample period, using data envelopment analysis (DEA), a non-parametric technique. In theory, ease of entry brought by financial liberalization leads to an expected increase in the industry's competitiveness under a contestable market due to increase in the number of players in the market. This leads to market efficiency improvement in the long run. According to microeconomic theory, firms that do not succeed in minimizing costs will be forced to exit the market. Keeping their efficiency scores up is very important in order for the companies to stay in the market despite of heightened competition brought by financial liberalization. In discussing the impact of financial liberalization on the efficiency of Philippine life insurance companies using data envelopment analysis, we begin by describing the flow of the entry and exit of companies for the past fifteen years. We then focus on measuring the efficiencies of the eighteen companies that are included in the firm level analysis of this paper. These companies are all present in the period 1991 to 2003. In addition, the paper also includes companies that entered the market in the given years however, we only chose some of these companies that satisfy the conditions and limitations presented in the paper. Sizes of the companies are also determined to see whether there is a relationship between the efficiency scores and the size of the company. Furthermore, we present and interpret the efficiency scores of all companies to describe the performance of the entire industry. Lastly, we compare the results to other related studies regarding the measurement of efficiency scores of life insurance market. Based on the overall results of this study, it shows that large companies on the average benefit from financial liberalization. Of the three aspects of efficiency, scale efficiency scores of the companies on average seem to have benefited from financial liberalization since it shows an upward trend especially in the case of medium-sized and large companies. However, the results suggest that the average industry performance efficiency reflects a downtrend probably caused by the slow market demand for insurance, and the capacity of the existing firms to supply the needed product for the Philippine market. Since there are relatively few firms existing in the market, this creates some sort of monopoly power for the incumbent firms leading to a gradual industry technical inefficiency, thus, higher consumer price and weaker consumer welfare.