Technical, allocative and cost efficiency in the Australian general insurance industry

Data envelopment analysis is used to calculate technical, allocative and cost efficiency indices for a sample of fifty-three Australian general insurers. The inputs used are labour, physical capital (in the form of both information technology and plant and equipment) and financial capital. The outputs are net premium revenues for housing-related insurance, transport-related insurance, indemnity-related insurance and other insurance, along with investment revenue. The results indicate that the major source of overall cost inefficiency would appear to be allocative inefficiency, rather than technical inefficiency, and that the largest twenty percent of insurers are significantly more efficient than the remaining firms. A second-stage analysis uses limited dependent variable regression techniques to relate efficiency scores to financial and non-financial information. Cost efficiency appears to be closely related to asset size, the proportion of non-premium income, and participation in compulsory third party (CTP) markets, but not to stock exchange listing or product range.