The X-efficiency of insurance companies in Kenya

Ngugi, Kelvin Mungai
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Strathmore University
This project seeks to determine the X-efficiencies ofboth life and non-life insurance companies in Kenya. It also establishes whether the X-efficiency ofthese insurance companies is affected by the type of business (life or non-life insurance companies), size of the finn and the profitability of the company. The data set consists of reinsurance costs, total benefits paid, administrative expenses, other expenses which altogether constitute the inputs and gross premiums are the outputs for the companies. The model to be used in this study is the Data Envelope Analysis. Using the Data Envelope analysis, the study shall be restricted to analyze the. efficiency of insurance companies by use of output-oriented Constant Return-to-Scale (CRS) . It is expected that firms operating at optimal economies of scale are expected to have the lowest costs and the resulting higher profits lead to higher market concentrations (Hao, 2004) . The results of the mean X-efficiency scores for the full sample of the large and small insurance companies was also determined. The large insurance companies recorded high mean efficiency scores compared to the small insurance companies. This implies that the larger insurance companies are operating efficiently relative to the small companies. The large insurance companies recorded a mean X-efficiency score of 69% compared to 29% for the small insurance companies. This means that the large insurance companies are operating at 69% output-oriented constant returns to scale while the small insurance companies are operating at 29% output-oriented constant returns to scale.