Determinants of Cost Efficiency and Productivity Growth of the Indonesian Insurance Industry

This paper provides new empirical evidences on determinants of cost efficiency and productivity performance of life and property-casualty insurance firms in Indonesia. Data envelopment analysis (DEA) method is used to investigate the cost efficiency and Total Factor Productivity (TFP) among a balanced panel of 118 insurance firms (35 life insurance and 83 property-casualty insurance) over the period of 2006-2008. Results show that on average, insurers were operating at a low level of cost efficiency. However, by constructing the Malmquist Indices, this research finds a positive productivity change for the two types of insurance firms due to an increasing use of technological advances. Furthermore, the paper estimates the influence of some environmental variables on the cost efficiency using a multiple regression analysis. New findings indicate significant negative effects among types of insurance, size, and solvency on the firm's cost efficiency. Meanwhile, market share and ownership structure have positive but insignificant effects on the firms' efficiency. These findings are additional empirical evidences for the efficiency analysis of life and property-casualty insurance in a developing country.