The Efficiency of UK General Insurance Companies

This paper explores the efficiency of UK specialist and composite insurers transacting general insurance business. The concept of efficiency concerns an insurer’s ability to produce a given set of outputs (such as premiums and investment income) via the use of inputs such as administrative and sales staff and financial capital. An insurer is said to be technically efficient if it cannot reduce its resource usage without some corresponding reduction in outputs, given the current state of production technology in the industry. An exploration of the value-based technical efficiency of UK general insurers is undertaken by comparing the relative performance of 431 general insurers licensed in six European countries using data from Standard & Poor’s Eurothesys database. The data has been made available on a (roughly) comparable basis as a result of the EU insurance Accounts Directive which only came fully into operation in 1996. The study uses the variable returns to scale formulation of the well-known data envelopment analysis to identify the locally-efficient and inefficient insurers within each country. A comparison is then undertaken for all insurers after adjusting for the impact of their local efficiency. The results for 1999 (the latest year of available data) indicate that UK general and composite insurance companies have the potential to be among the most efficient in Europe. On average, after adjusting for local inefficiencies, UK insurers demonstrate an average efficiency score of around 77% which is substantially higher than the corresponding average figures for France (67%), Germany (70%), Italy (56%), The Netherlands (69%) and Switzerland (66%). However there is also evidence that many UK companies are not currently realising their potential for efficiency improvements in comparison with their European counterparts.