Chapter-V Efficiency and Productivity Analysis of General Insurance Industry in India

The reforms in the Indian insurance sector has opened new vistas in the insurance industry and has generated intensely competitive environment. The insurance companies have to ensure quality products at competitive price. The detarrification of general insurance industry has led to more competition based on cost leadership. All these changes compel less efficient firms to either raise their level of efficiency or to exit the sector completely. It also increases the industry level efficiency which can improve if inefficient firms either catch up with their efficient rivals or the most efficient firm through technological improvement continues to lead efficiency gains. Thus, general insurance companies in India now potentially compete in the market. The reform in insurance sector is expected to put heavy pressure on firms to increase efficiency of operations in order to survive the expected competition (Rai, 1996). It is not surprising, therefore, that there is a growing interest and

concern about the efficiency analysis of General Insurance companies operating in India. So, in this chapter, an attempt has been made to assess the efficiency of the public and private sector General Insurance companies in India. In the pre-reform period, competition in the General Insurance business was limited only to the four public sector General Insurance companies, but in the post-reform period, the entry of a good number of private sector general insurers, however, made the market fiercely competitive. 5.1 Concept of Efficiency The concept of efficiency concerns an insurer's ability to produce a given set of outputs via the use of inputs. 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 (Diacon et al., 2002). In efficiency analysis, the production function is interpreted not only as a relationship between inputs and outputs, but also as
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the frontier of a set called the production set. A point lying on the frontier is characteristically one that corresponds to the maximum achievable quantity of output for any given level of input or also the minimum required quantity of input for any given level of output. A distinction then naturally follows between productive activities in the production set. Every productive activity belonging to the frontier is defined as efficient, while those lying below are said to be inefficient (Donni and Fecher, 1997). Technical Efficiency The technical efficiency of the DMU is computed the difference between its output to input ratio and the ratio achieved by the best DMU. It can be expressed as the potential to increase quantities of outputs for given quantity of inputs (outputs maximization) or the potential to reduce the quantities of inputs used in producing given quantity of outputs (input minimization) (Garg and Deepti, 2008). A producer is technically efficient if an increase in any output requires a reduction in at least one other output or an increase in at least one input (Koopmans, 1951). In case of output or revenue maximization, technical efficiency is defined as one minus the maximum equiproportionate expansion in all outputs with given input. It refers to the ability of a productive unit to reduce all variable inputs to produce same level of output, or expand all variable outputs for the given inputs (Sinha, 2006). Technical Inefficiency A firm is technically inefficient if it operates below its production possibility frontier (or above the minimum cost frontier). A firm is technically inefficient if it uses excessive inputs or produces too little outputs with the inputs used (Weiss, 1991). Technical inefficiency results from a firm not operating with the "best-technology", i.e., it is using excessive resources to produce a given amount of output. Technical efficiency is further decomposed into pure technical efficiency (PTE) and scale efficiency (SE).

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Pure Technical Efficiency This measures the extent to which a firm can decrease its inputs or increase output (in fixed proportion) while still remaining within the VRS frontier. Thus, technical efficiency measures the DMUs overall success at utilizing its inputs. Pure technical efficiency is the proportion by which a firm could reduce its input usage by implementing the best technology portrayed by the variable returns to scale (VRS) frontier. Scale Efficiency A fixed amount of increase in inputs may or may not give a proportionate increase in outputs. If outputs increase in equal proportion to an increase in inputs then it is a case of Constant Returns to Scale (CRS). However, if the increase in outputs is not proportionate with increase in inputs, then, it is a case of Variable Returns to Scale (VRS). In VRS, the increase in outputs may be either more or less, but not proportionate to the increase in inputs. CRS is simple and easy to compute. However, it does not take into account the economies of scale, which is not the case always. Considering Indian general insurance companies, there is a considerable difference between the scale of operations of private and public insurers. Such a situation is best handled by VRS, efficiency of the unit is specified in terms of other units in the data set of similar scale size only. Due to the difference in CRS and VRS a few inefficient DMUs on CRS may turn out to be efficient on VRS (Garg and Deepti, 2008). Scale efficiency is the ratio of CRS technical efficiency to VRS technical efficiency. If the ratio is equal to one, the firm exhibits CRS. If scale efficiency is less than one the respective firm exhibits VRS

(increasing/decreasing) (Sinha, 2006). Insurers may have lower unit costs and higher unit profits simply because they operate at optimal scale. Thus, firms with similar technology and comparably skilled management may operate at different levels of scale efficiency (Choi and Weiss, 2005). This reflects the extent to which a firm projected to the VRS efficiency frontier can further

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decrease its inputs (again in fixed proportions) while still remaining within the constant returns to scale frontier. Thus, scale efficiency measures the extent to which a firm can reduce inputs by moving to a part of the frontier with more beneficial returns to scale characteristics (Diacon et al., 2002). Scale Inefficiency However, a firm operating on the VRS frontier is scale inefficient because it is not operating on the socially and economically optimal constant returns to scale (CRS) frontier. Scale efficiency is measured by the ratio from the CRS frontier to the VRS frontier (Leverty and Grace, 2008). A firm is scale inefficient if inputs and outputs are not allocated in proportion to the correct input and output price ratios (Weiss, 1991). 5.2 Measurement of Efficiency Traditionally, analysts have analysed the efficiency of organisations (or decision- making units- DMUs) by focusing on certain simple ratios such as labour productivity (output per unit of labour employed) or capital intensification (i.e. capital/labour). Similarly, the efficiency of insurance firms has often been measured by key ratios such as the expenses and claims ratios, the solvency margin, and the return on invested assets. There are, however, a number of problems associated with a simplistic multiple-ratio analysis. It is generally impossible to identify the best- practice unit (DMUs) since it is unlikely that all ratios will point to the same firm/s; If the ratios disagree, it may be difficult to decide in advance which ratio should be given most weight in order to compare DMUs; Efficiency comparisons should properly be made on the basis of likefor-like so that inefficient firms are identified, because, in some way, they are inferior to other similar DMUs; The traditional measures do not readily allow firms to identify the source of any inefficiency. More modern approaches to efficiency and benchmarking try to circumvent the problems associated with traditional methods by using frontier efficiency methodologies. Essentially, the various methods proceed by first
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identifying 'best practice' frontiers (and the DMUs which lie nearest to these frontiers). The frontier represents the best performance that can be achieved using the currently available production technology. By definition, a DMU which is part of the frontier set uses a minimum amount of inputs in order to achieve any given level of contemporaneous outputs. The efficiency of each DMU can then be measured by comparing it to the 'frontier' firms that are nearest to it. The Best Practice Frontier Two main alternative approaches are available to identify the 'best practice' frontier and the firms in the frontier set. The econometric or

parametric approach of Stochastic Frontier Analysis (SFA) fits a pre-specified production function (with multiple inputs but usually only one output) and allows DMUs to be off the frontier either because they are inefficient or because of random shocks or measurement errors. Some SFA methods require the asymmetric probability distribution of the inefficiency component to be specified in advance, while others in contrast, non- parametric methods such as data envelopment analysis use linear programming techniques to discover the frontier firms and construct a convex piece-wise linear surface or frontier over these firms. In terms of technical efficiency, the most efficient firms are those with the largest value (over all firms) of the ratio of the weighted sum of outputs to the weighted sum of inputs, where the optimal weight for each firm maximizes that particular firm's ratio. Non- parametric methods have the

advantage of not having to specify the form of the production function or error distribution and can also handle multiple outputs as well as multiple inputs. On the other hand, non-parametric frontiers do not normally have any stochastic component, so that any departure form the frontier must be categorized as inefficiency. Therefore, in this study non-parametric methods, namely, data envelopment analysis (DEA) was used to assess the efficiency of the general insurance companies.

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Overview of Data Envelopment Analysis (DEA) DEA is a tool for quantifying the relative performance of organizations, given their multiple inputs and outputs. DEA uses the principle of linear programming to examine how a particular Decision Making Unit (DMU), here the insurance company, performs relative to other DMUs in the sample. DEA was developed by Charnes et al. (1978) and was later enhanced by Banker et al. (1984).The performance of any DMU is evaluated in terms of productivity or efficiency. Productivity refers to the output produced per unit of input, while efficiency implies a comparison of the actual output/input to the best output/input ratio. The best output/input ratio means the best practicing firm in a sample. This study deals with the technical efficiency and scale efficiency of the Indian general insurance companies, calculated using the DEA model. The current study attempts to measure the technical efficiency using the output maximization model. The Indian insurance industry, still in its nascent stage, has a huge potential to be tapped. So, it makes sense to use output maximization model. Three approaches have been taken for outputs to assess efficiency and productivity. The logic for taking three output models has been discussed in detail in Chapter-III. 5.3 Comparative Efficiency Analysis of the Public and Private Sector General Insurance Companies The study seeks to assess the comparative efficiency of the public and private sector general insurance companies in the post-reform period, using Data Envelopment Analysis. When different outputs provide different conclusions, researchers need to be careful about interpreting results. It may not be appropriate to use only one approach and to draw conclusions from the results of that approach (Jeng and Lai, 2005). Therefore, in this study, three models of output have been used to examine the efficiency and productivity of general insurance companies in India. In the first model, net written premium has been taken as proxy for the output; in the second, net claim incurred has been taken as output; and in the third, net premium written and investment income have been taken as output.

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The premiums are usually paid in advance of loss payment. It is necessary to appropriately account for investment income when measuring insurance output (Cummins and Weiss, 1998). When it comes to the choice of inputs, there is general agreement that labour (administrative, managerial and sales) and capitals are the main input resources utilized in the production of insurance. Although it may be possible to undertake a head count of staff, most studies use total operating and selling costs as a proxy. In the insurance industry, this approximation is a necessity because of the widespread industry practice of outsourcing administrative and sales functions (so that a simple head count would seriously underestimate staff inputs). This study uses staff and capital resources as the main inputs. The inputs of sales, administrative and managerial staff are proxied by the insurers total operating expenses including commission. Capital inputs included shareholders capital plus reserves & surplus. The rational to use three output models has been discussed in detail in chapter III. Model-I Output : Input : Premium Operating Expenses (including commission) and Capital Table 5.1 Technical Efficiency (Constant Return to Scale) of General Insurance Companies in the Post-reform Period (Output: Premium)
2002-03 1.000 0.856 1.000 0.964 0.955 0.690 1.000 1.000 0.734 1.000 0.436 0.077 0.130 0.633 2003-04 1.000 0.564 0.805 0.660 0.757 0.728 0.354 0.960 0.728 1.000 1.000 0.328 0.486 0.698 2004-05 0.868 0.512 0.598 0.508 0.622 0.652 0.766 0.958 0.774 1.000 1.000 0.531 0.509 0.774 2005-06 0.924 0.566 0.581 0.470 0.635 0.811 0.904 0.933 0.660 1.000 0.934 0.611 0.482 0.792 2006-07 0.787 0.621 0.706 0.530 0.661 1.000 1.000 0.846 0.650 1.000 0.949 0.564 0.460 0.809 2007-08 0.790 0.793 0.753 0.655 0.748 0.991 0.776 1.000 0.669 1.000 1.000 0.812 0.599 0.856 Mean 0.895 0.652 0.741 0.631 0.730 0.812 0.800 0.950 0.703 1.000 0.887 0.487 0.444 0.760

Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

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Table 5.1 reports the results of insurer-wise technical efficiency (CRS) from the year 2002-03 to 2007-08. The results show that average technical efficiency of both the public and private sector general insurance companies from 2002-03 to 2007-08 is 73% and 76% respectively. Thus, the technical efficiency of the private sector general insurance companies is higher by 3 per cent than that of the public sector. Among the public sector, the National Assurance Company consistently occupied the top slot for all the years, i.e., achieving 89 per cent average efficiency. But the public sector efficiency shows a decreasing trend because the average efficiency in the year 2002-03 was 96 per cent which has been reduced to 75 per cent in the year 2007-08. On the other hand, the private sector general insurance companies' efficiency has shown an increasing trend. The average technical efficiency of the private sector insurers was 63 per cent during the year 2002-03 which increased to 86 per cent during 2007-08. Among all the insurers, Bajaj Allianz appeared as the most efficient company during the whole period under study by achieving 100 per cent efficiency. Iffco-Tokio and ICICI Lombard got second and third place among the private insurers by achieving average efficiency of 95 per cent and 89 per cent respectively. Cholamandlam and HDFC Chubb are most inefficient insurers which achieved 49 per cent and 44 per cent respectively average efficiency level. So, both Cholamandlam and HDFC need to improve their efficiency level by 51 per cent and 56 per cent respectively in order to attain the maximum efficiency level. Year-wise results show that in 2002-03, only two out of a total of four public sector insurers and three out of a total of eight private sector insurers displayed maximum efficiency level, whereas in 200304, only a single public sector insurer and two private insurers could exhibit the same efficiency level. In the years 2004-05 and 2007-08, only two private insurers Bajaj Allianz and ICICI Lombard achieved the maximum efficiency level, whereas in 2005-06, only Bajaj Allianz could show the same efficiency level. The comparison shows that the efficiency of the private sector general insurance companies improved during the post-liberalization period.

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Table 5.2 Technical Efficiency (Variable Return to Scale) of General Insurance Companies in the Post-reform Period (Out Put : Premium)
Name of the Company 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Mean

National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean

1.000 1.000 1.000 1.000 1.000 0.695 1.000 1.000 0.737 1.000 0.437 0.114 1.000 0.748

1.000 1.000 0.810 0.843 0.913 0.736 1.000 1.000 0.826 1.000 1.000 0.336 0.496 0.799

1.000 1.000 0.881 0.788 0.917 0.716 1.000 1.000 0.994 1.000 1.000 0.636 0.561 0.863

1.000 1.000 0.978 0.799 0.944 1.000 1.000 0.937 0.715 1.000 0.986 1.000 1.000 0.955

1.000 1.000 1.000 0.796 0.949 1.000 1.000 0.856 0.658 1.000 1.000 1.000 1.000 0.939

1.000 1.000 0.963 0.849 0.953 1.000 0.779 1.000 0.716 1.000 1.000 1.000 1.000 0.937

1.000 1.000 0.939 0.846 0.946 0.858 0.963 0.966 0.774 1.000 0.904 0.681 0.843 0.874

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

Table 5.2 presents the technical efficiency under VRS of both the public and private sector general insurance companies from the year 2002-03 to 2007-08. The average pure technical efficiency of the public sector general insurance companies is higher than that of the private sector. The average pure technical efficiency of the public sector general insurance companies is 95 per cent, whereas that of the private sector is 87 per cent. Among the public sector insurers, National, and New India, while among the private sector insurers only Bajaj Allianz proved themselves to be fully efficient (DMUS) by achieving 100 per cent efficiency throughout the period of study. The efficiency of Oriental Insurance Company in the year 2002-03 was 100 per cent which declined to 96 per cent in the year 2007-08, while the average efficiency of this company is 94 per cent. Similarly, United India with its lowest efficiency level among the public sector insurers showed maximum efficiency in the year 2002-03 which declined to 85 per cent level in the year 2007-08. Iffco-Tokio with 97 per cent average efficiency level and Reliance with 96 per cent level were placed second and third among the private sector insurers. Cholamandalam with an
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efficiency level of 68 per cent was found to be the most inefficient company. It's efficiency level was far below the overall average efficiency level of 87 per cent of the private insurers. In the private sector, Reliance exhibited maximum efficiency during the period 2002-03 to 2006-07 and could not maintain that level only in the year 2007-08. Iffco-Tokio maintained its maximum efficiency level during the years 2002-03 to 2004-05 and 2007-08. The average pure technical efficiency results indicate that in the year 2002-03 the private insurers lagged behind the public insurers, but they were improving their efficiency scores quickly. Year-wise results show that the pure technical efficiency of the public insurers is higher than that of the private insurers during the whole period under study except in the year 2005-06 when the average pure technical efficiency of the private insurers was 95.5 per cent, and that of the public insurers was 94.4 per cent. Table 5.3 Scale Efficiency of General Insurance Companies in the Post-reform Period (Output: Premium)
Return to Scale 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2002-03 2003-04 2004-05 2005-06 2006-07 drs drs drs drs crs crs irs irs crs drs irs irs Name of the company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2007-08 crs drs crs drs irs drs crs irs crs crs irs irs Mean

1.000 0.856 1.000 0.964 0.955 0.992 1.000 1.000 0.995 1.000 0.999 0.677 0.130 0.849

1.000 0.564 0.995 0.783 0.836 0.989 0.354 0.960 0.882 1.000 1.000 0.975 0.979 0.892

0.868 0.512 0.678 0.644 0.676 0.911 0.766 0.958 0.779 1.000 1.000 0.835 0.906 0.894

0.924 0.566 0.594 0.588 0.668 0.811 0.904 0.997 0.923 1.000 0.947 0.611 0.482 0.834

0.787 0.621 0.706 0.666 0.695 1.000 1.000 0.988 0.989 1.000 0.949 0.564 0.460 0.869

0.790 0.793 0.781 0.772 0.784 0.991 0.997 1.000 0.934 1.000 1.000 0.812 0.599 0.917

0.895 0.652 0.792 0.736 0.769 0.949 0.837 0.984 0.917 1.000 0.983 0.746 0.593 0.876

crs drs crs drs

crs drs drs drs

drs drs drs drs

drs drs drs drs

drs crs crs drs crs crs irs irs

irs irs irs irs crs crs irs irs

irs irs irs irs crs crs irs irs

irs irs irs irs crs drs irs irs

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08 (crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale

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Table 5.3 presents the company-wise scale efficiency scores and return to scale for the years 2002-03 to 2007-08. Scale efficiency score of 1.00 attained by Bajaj Allianz for the whole period indicates that the company enjoys the constant return to scale, i.e., the proportion of increase of output is equal to proportion of input increase. The scale efficiency scores of all other general insurance companies are mostly less than 1.00 which indicates that these companies enjoy mainly either decreasing return to scale or increasing return to scale. Among the public insurers, National Insurance registered the scale efficiency score of 1.00 during the years 2002-03 and 2003-04, Oriental attained the same score only in the year 2003-04. However, among the private insurers, Royal Sundaram got the scale efficiency score of 1.00 in the year 2006-07, Reliance in 2002-03 and 2006-07, Iffco-Tokio during the period 2002-03 to 2007-08, and ICICI Lombard from 2002-03 to 2004-05 and 200708. It means during the said years, these companies enjoyed constant return to scale. Among the public sector companies, New India and United India enjoyed continuously decreasing return to scale from 2002-03 to 2007-08 and their average efficiency scores were 0.65 and 0.74 respectively. On the other hand, among the private sector companies, Cholamandalam and HDFC Chubb indicated a continuous increasing return to scale from 2002-03 to 2007-08 and achieved average efficiency scale scores of 75 and 59 respectively. The results lead to the fact that the overall average scale efficiency of the public sector showed a decreasing trend from 2002-03 to 2007-08, whereas in 2002-03 the average scale efficiency score was 96 which declined to 78 in the year 2007-08. The private sector scale efficiency indicates an increasing trend. The study also reported that the public insurers are mostly enjoying decreasing return to scale and the private insurers mostly enjoy increasing return to scale. So, this research suggests that the private sector should increase their business size to get the benefit of a large scale economy and also in the long run, to achieve the target of constant return to scale.

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Model- II Output : Premium and Investment Income Input : Operating Expense (Including commission and capital) Table 5.4 Technical Efficiency (Constant Return to Scale) of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 Mean 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.874 0.703 0.784 1.000 1.000 1.000 0.894 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.940 0.897 1.000 0.981 1.000 0.970 0.969 0.911 0.920 1.000 0.995 1.000 0.966 0.695 0.728 0.652 0.811 1.000 0.991 0.813 1.000 0.717 0.928 1.000 1.000 0.776 0.904 1.000 0.960 0.958 0.934 0.862 1.000 0.952 0.734 0.730 0.788 0.663 0.655 0.669 0.707 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.462 1.000 1.000 1.000 0.989 1.000 0.909 0.278 0.394 0.531 0.640 0.584 0.812 0.540 0.139 0.492 0.509 0.496 0.474 0.599 0.452 0.664 0.753 0.796 0.818 0.821 0.856 0.784

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

In table 5.4 the insurer-wise technical efficiency (CRS) has been analysed, a comparison between the efficiency of both the public and private insurers for the period 2002-03 to 2007-08 has been made. Among the public insurers, National and Oriental companies while among the private insurers Bajaj Allianz recorded 100 per cent efficiency during the whole period of study. Other public sector insurers, viz. New India and United were found to have an average efficiency level with 89.4 per cent and 97 per cent values respectively for the same. Similarly, other private sector insurers, viz. IffcoTokio, ICICI Lombard, Reliance, Royal Sundaram & Tata AIG were found to have an average efficiency level with 95.2 per cent, 90.9 per cent, 90.4 per cent, 81.3 per cent and 70.7 per cent values respectively for the same. HDFC Chubb reported the least efficiency of 45.2 per cent followed by Cholamandalam with 54 per cent efficiency. All the public insurers showed
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100 per cent efficiency during the period 2005-06 to 2007-08 except United India in the year 2006-07 which achieved 98 per cent efficiency. ICICI

Lombard also showed improvement in its efficiency during the period 2003-04 to 2007-08 by achieving mostly 100 per cent level, although in the year 200203, it could attain only 46 per cent efficiency. The results indicate that the average technical efficiency under CRS of the public insurers is 96.6 per cent, whereas that of private insurers is 78.4 per cent. The results further reveal that the public sector insurers are technically more efficient than the private insurers. Although the efficiency level of private insurers has shown an

increasing trend, i.e., the mean efficiency of the private insurers in the year 2002-03 was 66 per cent which increased to 85.6 per cent in the year 2007-08. No doubt, the private insurers are trying hard to attain the efficiency level of the public insurers, but still they need more to do. Table 5.5
Technical Efficiency (Variable Return to Scale) of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2002-03 1.000 1.000 1.000 1.000 1.000 0.696 1.000 1.000 0.737 1.000 0.901 0.840 1.000 0.897 2003-04 1.000 1.000 1.000 1.000 1.000 0.738 1.000 1.000 0.847 1.000 1.000 0.540 0.548 0.834 2004-05 1.000 1.000 1.000 0.947 0.987 0.716 1.000 1.000 1.000 1.000 1.000 0.636 0.574 0.866 2005-06 2006-07 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.983 1.000 0.996 1.000 1.000 1.000 1.000 0.937 0.880 0.730 0.664 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.958 0.943 2007-08 Mean 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.988 1.000 0.997 1.000 0.858 0.779 0.963 1.000 0.970 0.716 0.782 1.000 1.000 1.000 0.984 1.000 0.836 1.000 0.854 0.937 0.906

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

Table 5.5 presents the results of technical efficiency under VRS, i.e., pure technical efficiency of both the public and private sector General Insurance companies from 2002-03 to 2007-08. The results indicate that

among the public sector, National, New India and Oriental general insurance companies exhibited decision making units i.e. fully efficient firms for all the period under study. United India also exhibited the maximum efficiency level
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except in the years 2004-05 and 2006-07 when its efficiency score was 94.7 per cent and 98.3 per cent respectively. Among the private insurers, Bajaj Allianz was found to be 100 per cent efficient during the whole period of study followed by ICICI Lombard with the efficiency score of 98.4 per cent. ICICI Lombard was also found to be 100 per cent efficient during the period 2003-04 to 2007-08 but in 2002-03 it scored 90.00 per cent. Reliance exhibited 100 per cent efficiency level during the period 2002-03 to 2006-07, while in 2007-08 its efficiency score was 78.2 per cent only Royal Sundaram, Cholamandalam, and HDFC Chubb recorded 100 per cent efficiency level from 2005-06 to 2007-08. Among the private insurers, Tata- AIG with a score of 78 per cent was found to be least efficient followed by Cholamandalam with 83.6 per cent. The overall results reveal that the efficiency level of the public sector insurers is higher than that of the private sector insurers as indicated by their average efficiency scores of 99.7 per cent and 90.6 per cent respectively. This gap in the scores can be eliminated by the private sector insurers only by being more efficient. Table 5.6 Scale Efficiency of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Return to Scale 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2002-03 2003-04 2004-05 2005-06 2006-07 crs crs crs irs crs crs irs irs crs drs irs irs Mean Name of the Company 2007-08 crs crs crs crs irs drs crs irs crs crs irs irs

National 1.000 1.000 1.000 1.000 1.000 1.000 1.000 crs crs crs crs New India 0.874 0.703 0.784 1.000 1.000 1.000 0.894 drs drs drs crs Oriental 1.000 1.000 1.000 1.000 1.000 1.000 1.000 crs crs crs crs United India 1.000 0.940 0.947 1.000 0.998 1.000 0.981 crs drs drs crs 0.969 0.911 0.933 1.000 1.000 1.000 0.969 Mean Royal Sundaram 0.999 0.987 0.911 0.811 1.000 0.991 0.950 irs irs irs irs Reliance 1.000 0.717 0.928 1.000 1.000 0.997 0.940 crs irs irs crs Iffco-Tokio 1.000 0.960 0.958 0.997 0.980 1.000 0.983 crs irs irs irs Tata AIG 0.995 0.862 0.788 0.908 0.986 0.934 0.912 drs irs irs irs Bajaj Allianz 1.000 1.000 1.000 1.000 1.000 1.000 1.000 crs crs crs crs ICICI Lombard 0.513 1.000 1.000 1.000 0.989 1.000 0.917 irs crs crs crs Cholamandalam 0.331 0.730 0.835 0.640 0.584 0.812 0.655 irs irs irs irs HDFC Chubb 0.139 0.899 0.886 0.496 0.474 0.599 0.582 irs irs irs irs 0.747 0.894 0.913 0.857 0.877 0.917 0.867 Mean Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.(crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale

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Table 5.6 reveals the scale efficiency and return to scale of the four public sector and eight private sector general insurance companies under study. The analysis provides that two companies, namely, National and Oriental from the public sector, whereas only Bajaj Allianz from the private sector exhibited 100 per cent scale efficiency during the whole period of the study, i.e., 2002-03 to 2007-08. The average scale efficiency of the public sector is higher than that of the private sector. The average scale efficiency of the public sector is 96.9 per cent, whereas in the case of the private sector it is 86.7 per cent. Among the public insurers, National and Oriental companies achieved average scale efficiency score of 1 followed by United India and New India with the respective scores of 0.981 and 0.894. Among the private insurers, Bajaj Allianz exhibited full scale efficiency followed by Iffco-Tokio, Royal Sundaram, Reliance, and ICICI Lombard with the 98.3 per cent 95 per cent, 94 per cent and 91.7 per cent respectively. Among the private insurers, HDFC Chubb was found to have the least efficiency score of 58.1 per cent followed by Cholamandalam which scored 65.5 per cent. From the year 2005-06 onwards, all the public sector insurers were found to be fully efficient. The least average efficiency score (75 per cent) and the highest average efficiency score (92 per cent) were exhibited by the private sector insurers during the year 2002-03 and 2007-08 respectively. It shows that the efficiency of private insurers improved with the passage of time. The analysis further indicates that among the public insurers, National and Oriental, and among the private sector companies only Bajaj Allianz enjoyed constant return to scale during the period under study. The other two public sector general insurers, New India and United enjoyed constant return to scale from 2005-06 onwards. Among the private insurers, all the private insurers except Bajaj Allianz and ICICI Lombard showed mostly increasing return to scale. So, it can be said that to improve scale efficiency and to achieve constant return to scale in the long run, the private insurers must increase their business to get the advantage of large scale economy.

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Model- III Output : Claim Input : Operating Expense (Including commission) and Capital Table 5.7 Technical Efficiency (Constant Return to Scale) of General Insurance Companies in the Post-reform Period (Output: Claim)
Name of the Company 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Mean National 0.973 1.000 1.000 1.000 1.000 1.000 0.996 New India 0.817 0.583 0.740 0.780 0.854 0.977 0.792 Oriental 1.000 0.748 0.943 0.782 1.000 0.981 0.909 United India 1.000 0.773 0.881 0.710 0.806 0.826 0.833 0.948 0.776 0.891 0.818 0.915 0.946 0.882 Mean Royal Sundaram 0.428 0.578 0.682 0.593 0.856 0.924 0.677 Reliance 1.000 0.405 0.984 0.923 0.616 0.679 0.768 Iffco-Tokio 0.507 0.758 0.920 0.784 0.922 0.980 0.812 Tata AIG 0.398 0.439 0.539 0.460 0.509 0.522 0.478 Bajaj Allianz 0.705 0.705 0.864 0.966 0.825 0.899 0.827 ICICI Lombard 0.207 1.000 1.000 0.815 0.956 1.000 0.830 Cholamandalam 0.013 0.213 0.674 0.704 0.439 0.585 0.438 HDFC Chubb 0.021 0.238 0.562 0.440 0.438 0.592 0.382 0.410 0.542 0.778 0.711 0.695 0.773 0.651 Mean
Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

Table 5.7 explains that among all the general insurance companies, only National public insurer was found to be fully efficient (DMUS) during the whole period of study except in the year 2002-03 in terms of technical efficiency under constant return to scale. Among the public insurers, National company exhibited the maximum efficiency of 99.6 per cent followed by Oriental, United India, and New India showing efficiency of 90.9 per cent, 83.3 per cent and 79.2 per cent respectively. Among the private insurers, both Bajaj Allianz and ICICI Lombard are found to be 83 per cent efficient followed by Iffco- Tokio, Reliance and Royal Sundaram which are 81.2 per cent, 76.8 per cent and 67.7 per cent efficient. HDFC Chubb and Cholamandlam are found to be least efficient and have average efficiency of 38.2 per cent and 43.8 per cent respectively. The average technical efficiency of the public sector is 88 per cent and that of the private sector is 65 per cent which indicates that the public
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sector general insurance companies are more efficient than the private ones. The average efficiency of private insurers was found to be 41 per cent during the year 2002-03, which increased to 77 per cent during the year 2007-08. The analysis brings out that there has been improvement in the efficiency level of the private insurers but still more efforts are required to attain the efficiency level of public sector insurers. Table 5.8 Technical Efficiency (Variable Return to Scale) of General Insurance Companies in the Post-reform Period (Output : Claim)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 Mean 0.989 1.000 1.000 1.000 1.000 1.000 0.998 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.752 0.956 0.782 1.000 1.000 0.915 1.000 0.864 0.909 0.716 0.836 0.863 0.865 0.997 0.904 0.966 0.875 0.959 0.966 0.944 0.580 0.737 0.802 1.000 1.000 1.000 0.853 1.000 1.000 1.000 1.000 0.838 0.690 0.921 1.000 1.000 1.000 0.791 1.000 1.000 0.965 0.559 0.698 0.951 0.582 0.576 0.554 0.653 1.000 1.000 0.956 1.000 0.898 0.915 0.962 0.335 1.000 1.000 0.820 1.000 1.000 0.859 0.039 0.260 0.732 1.000 1.000 1.000 0.672 1.000 0.315 0.652 1.000 1.000 1.000 0.828 0.689 0.751 0.887 0.899 0.914 0.895 0.839

Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.

Table 5.8 presents the technical efficiency (VRS), i.e., pure technical efficiency of the public and private sector general insurance companies from the period 2002-03 to 2007-08. The analysis indicates that among all the insurers, the two public sector general insurance companies, namely, National and New India exhibited average efficiency score of 100 per cent during the period 2002-03 to 2007-08, and retained their position as decision-making units continuously except the National company during the year 2002-03 when it achieved 98.9 per cent efficiency. The pure technical average efficiency of the public sector is more than that of the private sector. The average pure technical efficiency of the public sector is found to be 99.7 per cent during the year 2002-03 which shows a large gap in the efficiency level of the public and

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private sectors. The gap in the efficiency level of the public and private sectors reduced during the period 2002-03 to 2007-08. The average pure technical efficiency of the public sector during the year 2007-08 is found to be 96.6 per cent and that of the private sector is 89.5 per cent. It clearly indicates that the private sector has improved its pure technical efficiency level from 69 per cent to 89.5 per cent, and the gap between the efficiency level of public and private sector has reduced during the period 2002-03 to 2007-08. Among the private insurers, Iffco-Tokio exhibited 96.5 per cent average efficiency level followed by Bajaj Allianz with 96.2 per cent. It has been found that Tata-AIG is the most inefficient insurer with average efficiency level of 65.3 per cent. HDFC Chubb and Cholamandalam showed 100 per cent efficiency from 2005-06 onwards. Table 5.9 Scale Efficiency of General Insurance Companies in the Post-reform Period (Output: Claim)
Return to Scale
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2002-03 2003-04 2004-05 2005-06 2006-07 Mean

Name of the Company

National 0.983 1.000 1.000 1.000 1.000 1.000 0.997 drs crs crs crs crs New India 0.817 0.583 0.740 0.780 0.854 0.977 0.792 drs drs drs drs drs Oriental 1.000 0.994 0.987 1.000 1.000 0.981 0.994 crs drs drs crs crs United India 1.000 0.895 0.969 0.991 0.963 0.957 0.963 crs drs drs drs drs 0.950 0.868 0.924 0.943 0.954 0.979 0.936 Mean Royal Sundaram 0.738 0.783 0.850 0.593 0.856 0.924 0.791 irs irs irs irs irs Reliance 1.000 0.405 0.984 0.923 0.736 0.985 0.839 crs irs irs irs irs Iffco-Tokio 0.507 0.758 0.920 0.992 0.922 0.980 0.847 irs irs irs irs irs Tata AIG 0.712 0.629 0.567 0.790 0.884 0.941 0.754 irs irs irs irs irs Bajaj Allianz 0.705 0.705 0.903 0.966 0.919 0.983 0.864 irs irs irs irs irs ICICI Lombard 0.617 1.000 1.000 0.995 0.956 1.000 0.928 irs crs crs irs irs Cholamandalam 0.336 0.820 0.920 0.704 0.439 0.585 0.634 irs irs irs irs irs HDFC Chubb 0.021 0.755 0.861 0.440 0.438 0.592 0.518 irs irs irs irs irs 0.580 0.732 0.876 0.800 0.769 0.874 0.772 Mean Source : Compiled from IRDA Annual Reports from 2002-03 to 2007-08.(crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale

crs drs drs drs

irs irs irs irs irs crs irs irs

Table 5.9 presents the company-wise scale efficiency scores and returns to scale from the period 2002-03 to 2007-08. National public insurer recorded the scale efficiency score of 1.00 continuously during the period 2003-04 to 2007-08 which indicates that the company enjoyed the constant return to scale. Oriental Insurance Company captured scale efficiency score of 1.00 in 2002-03 and from 2005-06 to 2006-07 which indicates that the company enjoyed

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2007-08

constant return to scale for these three years only. Among the private insurers, only ICICI Lombard captured scale efficiency score of 1.00 in the years 200304 to 2004-05 and 2007-08 which indicates that the company enjoyed constant return to scale for these three years only. The results indicate that during the period of study all the private sector general insurance companies except three years of ICICI Lombard as mentioned earlier and one year in the case of Reliance, these companies are found to be in the stage of increasing return to scale. It means that the private sector insurance companies should expand their business further to improve their scale efficiency level and get the benefit of large scale economy. On the other hand, all the public sector general insurance companies, except National, mostly showed a decreasing return to scale. Among the public insurers, New India showed a decreasing return to scale throughout the study period. The results obtained after using the three different models of output reveal that during the post-reform period the efficiency of both the public and private sector general insurance companies were not the same. In the premium output model, the average technical efficiency under CRS of the private and public sectors is 0.76 and 0.73, and average technical efficiency under VRS is 0.874 and 0.769 respectively. The results indicate that technical efficiency under CRS and scale efficiency of the private sector is higher than that of the public sector, whereas technical efficiency under VRS of the public sector is higher than that of the private sector. The comparison also exhibits continuous improvement in the efficiency of the private sector general insurance companies. The average pure technical efficiency results further show that during the year 2002-03, the private insurers lagged behind the public insurers, but they are fast catching up and the efficiency scores of the private sector seem to improve. It has been observed that most of the private sector companies enjoyed mainly increasing return to scale, while the public sector companies enjoyed mainly decreasing return to scale. In the premium and investment income output model, the technical efficiency both under CRS and VRS, and scale efficiency of the public sector is
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higher than that of the private sector. Among the public insurers, National and Oriental companies, while among the private insurers Bajaj Allianz appeared fully efficient general insurance companies in terms of technical efficiency CRS, VRS and scale efficiency. New India also appeared to be fully efficient in terms of technical efficiency under VRS. The efficiency of the private sector showed an upward trend but it still lags behind the public sector. The study further provided that National and Oriental companies among the public sector, whereas Bajaj Allianz from the private sector enjoyed constant return to scale and the other private insurers mostly enjoyed increasing return to scale. In the claim output model, the technical efficiency under both CRS and VRS, and scale efficiency of the public sector is higher than that of the private sector. New India appeared to be fully efficient under technical efficiency (VRS) throughout the study period. The private sector companies showed an improvement in their efficiency level during the study period but they still lagged behind their counterparts. The analysis also revealed that mostly public insurers enjoyed decreasing return to scale and private insurers enjoyed increasing return to scale. So, the private sector companies need to expand their business in order to avail the benefit of large scale economy which may result in improving their efficiency. Thus, the study rejected the hypothesis that the efficiency of the private sector is higher than that of the public sector during the post-reform period. 5.4. Efficiency Analysis of the Public Sector General Insurance Companies during the Pre- and Post-reform Periods Recognizing the importance of the financial sector for the development of economy, various reforms were introduced in the Indian financial sector in order to enhance its efficiency and productivity. As the insurance sector has a dominant role to play in the financial system, many of these reforms were introduced in this sector. The main objective of the insurance sector reforms was to increase the efficiency and productivity of the insurance sector. It is essential to study whether these reforms have provided the desired results.
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Thus, the present study attempts to compare the efficiency of Indian public sector general insurance companies during the pre and post-reform periods. Model I Output : Premium Input : Operating Expense (including commission) and Capital Table 5.10 Technical Efficiency (Constant Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Periods (Output: Premium)
Year National Pre-reform Period 1993-94 1.000 1994-95 0.854 1995-96 0.705 1996-97 0.674 1997-98 0.731 1998-99 0.663 1999-00 0.592 0.746 Mean Post-reform Period 2000-01 0.610 2001-02 0.556 2002-03 0.978 2003-04 1.000 2004-05 1.000 2005-06 1.000 2006-07 0.948 2007-08 0.920 0.877 Mean New India 1.000 0.963 0.713 0.693 0.680 0.649 0.543 0.749 0.462 0.444 0.815 0.727 0.712 0.712 0.630 0.680 0.648 Orienta l 1.000 0.895 0.714 0.786 0.785 0.760 0.640 0.797 0.663 0.694 1.000 0.803 0.806 0.785 0.863 0.817 0.804 United India 1.000 0.857 0.796 0.820 0.771 0.692 0.604 0.791 0.616 0.559 0.881 0.730 0.652 0.575 0.558 0.540 0.639 MEA N 1.000 0.892 0.732 0.743 0.742 0.691 0.595 0.771 0.588 0.563 0.919 0.815 0.793 0.768 0.750 0.739 0.742

Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public sector general insurance companies from 1993-94 to 1999-00.

Table 5.10 presents the comparative technical efficiency (CRS) of the four public sector general insurance companies during the pre- and post-reform periods. It is clear from the table that during the pre-reform period, the average technical efficiency of all the four public sector companies, viz. National, New India, Oriental and United India was 74.6 per cent, 74.9 per cent, 79.7 per cent and 79.1 per cent respectively. Similarly, during the post-reform period, the average technical efficiency of these companies was 87.7 per cent, 64.8 per cent, 80.4 per cent and 63.9 per cent respectively. The average technical efficiency of National Insurance Co. was found to be higher during the post-

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reform period than the pre-reform period. The other public sector insurance companies, namely, New India and United India recorded lower average technical efficiency during the post-reform period than the pre-reform period. The study clearly reveals that the reforms introduced in the insurance industry positively affected the efficiency of the National Insurance Company. The efficiency of the company improved during the post- reform period. National Insurance was found to be fully technically efficient during 2003-04 to 2005-06 in the post-reform period. The reforms had their maximum adverse effect on the efficiency of United India followed by New India. The efficiency of United India and New India reduced by 15.2 per cent and 10.1 per cent respectively. The average technical efficiency of the Oriental General Insurance Company was insignificantly reduced during the post-reform period. The efficiency of all the public sector insurers except National Co. showed mostly a decreasing trend during the post-reform period. Year-wise analysis shows that all the public insurers exhibited 100 per cent efficiency during the year 1993-94. Table 5.11
Technical Efficiency (Variable Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Periods (Output: Premium) Year National New India Oriental United India MEAN Pre-reform Period 1993-94 1.000 1.000 1.000 1.000 1.000 1994-95 0.856 0.971 0.908 0.918 0.913 1995-96 0.737 0.818 0.719 0.845 0.780 1996-97 0.699 0.802 0.806 0.890 0.799 1997-98 0.872 0.853 0.847 0.888 0.865 1998-99 0.761 0.843 0.832 0.926 0.841 1999-00 0.697 0.748 0.757 0.864 0.767 0.803 0.862 0.838 0.904 0.852 Mean Post-reform Period 2000-01 0.739 0.694 0.749 0.900 0.771 2001-02 0.630 0.686 0.857 0.868 0.760 2002-03 0.996 1.000 1.000 1.000 0.999 2003-04 1.000 0.913 0.901 0.905 0.930 2004-05 1.000 0.943 0.906 0.907 0.939 2005-06 1.000 1.000 0.973 0.912 0.971 2006-07 1.000 1.000 1.000 0.978 0.995 2007-08 1.000 1.000 0.974 1.000 0.994 0.921 0.905 0.920 0.934 0.920 Mean
Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00.

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Table 5.11 reveals that the pure technical efficiency of the public sector general insurance companies during the post-reform period is higher than the pre-reform period. In the case of National Insurance Company, maximum efficiency was observed in the years 2003-04 to 2007-08 during the postreform period, and in a single year, i.e., 1993-94 during the pre-reform period. The average pure technical efficiency of the National Insurance Co. during the pre-reform period is 80.3 per cent, whereas it is 92.1 per cent during the postreform period which is higher by 11.8 per cent. New India Insurance Company achieved average efficiency of 86.2 per cent and 90.5 per cent during the preand post-reform periods respectively. Table 5.12 Scale Efficiency of Public Sector General Insurance Companies in the Preand Post-reform Periods (Output: Premium)
Year National New India 1.000 0.992 0.871 0.864 0.797 0.770 0.727 0.860 0.665 0.647 0.815 0.796 0.755 0.712 0.630 0.680 0.713 Oriental 1.000 0.986 0.993 0.975 0.927 0.914 0.845 0.949 0.885 0.810 1.000 0.892 0.890 0.807 0.863 0.839 0.873 United 1.000 0.933 0.942 0.921 0.869 0.748 0.699 0.873 0.685 0.644 0.881 0.807 0.718 0.630 0.570 0.540 0.684 MEAN 1.000 0.977 0.941 0.931 0.858 0.826 0.780 0.902 0.765 0.746 0.920 0.874 0.841 0.787 0.753 0.745 0.804 National crs drs drs drs drs drs drs New India crs drs drs drs drs drs drs Oriental crs drs drs drs drs drs drs United crs drs drs drs drs drs drs

Pre-reform Period 1993-94 1.000 1994-95 0.997 1995-96 0.956 1996-97 0.964 1997-98 0.838 1998-99 0.871 1999-00 0.850 0.925 Mean Post-reform Period 2000-01 0.826 2001-02 0.882 2002-03 0.982 2003-04 1.000 2004-05 1.000 2005-06 1.000 2006-07 0.948 2007-08 0.920 0.945 Mean

drs drs drs crs crs crs drs drs

drs drs drs drs drs drs drs drs

drs drs crs drs drs drs drs drs

drs drs drs drs drs drs drs drs

Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00. (crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale

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The pure technical efficiency of Oriental and United India General Insurance Companies during the pre-reform period is 83.8 per cent and 90.4 per cent respectively, whereas during the post-reform period it is 92.0 per cent and 93.4 per cent respectively. Year-wise results show that during the year 1993-94 all the public insurers exhibited 100 per cent efficiency, whereas in the postreform period during 2006-07 and 2007-08 it was 99.5 per cent and 99.4 per cent respectively. It is evident from the study that reforms had a positive impact on the pure technical efficiency of the public insurers. Table 5.12 presents the scale efficiency of the public sector general insurance companies during the pre- and post-reform periods. The results indicate that the average scale efficiency of the National Insurance Company showed as increase of only 1.5 per cent during the post-reform period. The other public sector insurance companies, namely, New India, Oriental and United India showed less average scale efficiency during the post-reform period. The average scale efficiency of the National, New India, Oriental and United India companies during the pre-reform period was 92.5 per cent, 86 per cent, 94.9 per cent, and 87.3 per cent respectively. Similarly, during the postreform period it was 94.5 per cent, 71.3 per cent, 87.3 per cent and 68.4 per cent respectively. National Insurance Co. attained the scale efficiency score of 1 during the year 1993-94 in the pre- reform period and during the years 200304 to 2005-06 in the post-reform period. The company enjoyed constant return to scale during these years. The New India, Oriental and United companies showed a decreasing return to scale in the post-reform period except the year 2002-03 when Oriental company showed a constant return to scale. In the prereform period, these companies exhibited mostly a decreasing return to scale except the year 1993-94 when all the public sector insurers enjoyed a constant return to scale.

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Model II Output : Premium and Investment Income Input : Operating Expenses (Including commission) and Capital Table 5.13 Technical Efficiency (Constant Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Period (Output: Premium and Investment Income)
Year National New India 1.000 1.000 0.911 0.817 0.876 0.806 0.737 0.878 0.500 0.704 0.831 0.861 0.884 1.000 1.000 1.000 0.848 Oriental 1.000 0.928 0.754 0.862 0.866 0.836 0.704 0.850 0.739 0.828 1.000 1.000 1.000 0.942 1.000 0.941 0.931 United India 1.000 0.983 0.931 0.994 0.916 0.878 0.805 0.930 0.825 0.855 1.000 1.000 0.959 1.000 0.954 1.000 0.949 MEAN 1.000 0.951 0.837 0.841 0.883 0.808 0.728 0.864 0.699 0.770 0.952 0.965 0.961 0.986 0.989 0.980 0.913

Pre-reform Period 1993-94 1.000 1994-95 0.894 1995-96 0.750 1996-97 1997-98 1998-99 1999-00 Mean Post-reform Period 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Mean 0.692 0.874 0.713 0.667 0.799 0.730 0.691 0.978 1.000 1.000 1.000 1.000 0.978 0.922

Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00.

Table 5.13 reveals the comparative technical efficiency (CRS) of the public sector general insurance companies during the pre- and post-reform periods. The results indicate that average technical efficiency of the National, New India, Oriental and United India Companies is 79.9 per cent, 87.8 per cent, 85 per cent and 93 per cent respectively during the pre- reform period, while during the post-reform period, these companies exhibited efficiency of 92.2 per cent, 84.8 per cent, 93.1 per cent and 94.9 per cent respectively. The National Insurance Company achieved 100 per cent efficiency level in only one year, i.e., 1993-94 during the pre-reform period, and in the years 2003-04 to

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2006-07 during the post-reform period. The New India exhibited efficiency score of 1 in two years of pre-reform period, i.e., 1993-94 to 1994-95 and three years of the post-reform period from 2005-06 to 2007-08. The analysis provides that National, Oriental and United India companies displayed higher technical efficiency during the post-reform period than the pre-reform period. The average technical efficiency of New India Insurance Co. was a little higher during the pre-reform period than the post-reform period. On the basis of above result, it can be said that the reforms have positively affected the efficiency of National, Oriental and United India companies, and negatively affected the efficiency of New India company. It has also been found that during the first two years of reforms, i.e., 2000-01 and 2001-02 the public sector insurance companies failed to improve their efficiency, but afterwards there was a great improvement in the efficiency level. Table 5.14 Technical Efficiency (Variable Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Periods (Output: Premium and Investment Income)
Year National Pre-reform Period 1993-94 1.000 1994-95 0.961 1995-96 0.762 1996-97 0.699 1997-98 0.875 1998-99 0.761 1999-00 0.697 0.822 Mean Post-reform Period 2000-01 0.739 2001-02 0.707 2002-03 0.996 2003-04 1.000 2004-05 1.000 2005-06 1.000 2006-07 1.000 2007-08 1.000 0.930 Mean
Source:

New India 1.000 1.000 0.933 0.825 0.878 0.843 0.748 0.890 0.694 0.706 1.000 0.929 0.944 1.000 1.000 1.000 0.909

Oriental 1.000 0.969 0.817 0.885 0.871 0.837 0.757 0.877 0.749 0.902 1.000 1.000 1.000 1.000 1.000 0.976 0.953

United India 1.000 1.000 0.993 1.000 0.919 0.926 0.864 0.957 0.900 0.903 1.000 1.000 0.959 1.000 0.980 1.000 0.968

MEAN 1.000 0.983 0.876 0.852 0.886 0.842 0.767 0.886 0.771 0.805 0.999 0.982 0.976 1.000 0.995 0.994 0.940

Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00.

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It is evident from Table 5.14 that the pure technical efficiency of the public insurers has improved during the post-reform period. The average pure technical efficiency of the National, New India, Oriental and United India general insurance companies during the pre-reform period is 82.2 per cent, 89 per cent, 87.7 per cent and 95.7 per cent respectively. Similarly, during the post-reform period it was 93 per cent, 90.9 per cent, 95.3 per cent and 96.8 per cent respectively. No doubt, the pure technical efficiency of New India and United India is higher during the post-reform period than the pre-reform period but the increase of 2 per cent and 1.1 per cent respectively is marginal only. National General Insurance Co. exhibited efficiency score of 100 per cent during the period 2003-04 to 2007-08. Further, it has been observed that the gap in efficiency level of the public insurers, viz. New India and United India during the whole period of study, i.e., from 1993-94 to 2007-08 is marginal. The study reveals that the reforms have contributed in improving the pure technical efficiency of the public insurers. Table 5.15 Scale Efficiency of Public Sector General Insurance Companies During the Pre and Post-reform Period (Output: Premium and Investment Income)
Year National New India Oriental United India MEAN National New India Oriental United India crs irs irs drs irs irs drs drs drs drs drs drs drs drs drs drs

1993-94 1.000 1.000 1.000 1.000 1.000 crs crs crs 1994-95 0.930 1.000 0.958 0.983 0.968 irs crs irs 1995-96 0.985 0.977 0.924 0.937 0.956 irs irs irs 1996-97 0.990 0.990 0.974 0.994 0.987 drs drs irs 1997-98 0.998 0.998 0.995 0.997 0.997 irs irs irs 1998-99 0.937 0.956 0.999 0.949 0.960 drs drs irs 1999-00 0.958 0.985 0.929 0.932 0.951 drs drs drs 0.971 0.987 0.968 0.970 0.974 Mean 2000-01 0.988 0.721 0.986 0.917 0.903 drs drs drs 2001-02 0.978 0.997 0.918 0.947 0.960 drs irs drs crs 2002-03 0.982 0.831 1.000 1.000 0.953 drs drs crs 2003-04 1.000 0.926 1.000 1.000 0.982 crs drs crs crs 2004-05 1.000 0.936 1.000 1.000 0.984 drs crs crs 2005-06 1.000 1.000 0.942 1.000 0.986 drs crs crs 2006-07 1.000 1.000 1.000 0.974 0.994 crs crs 2007-08 0.978 1.000 0.965 1.000 0.986 drs drs 0.991 0.926 0.976 0.980 0.968 Mean Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00. (crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale

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Table 5.15 presents the results of scale efficiency of the public sector general insurance companies in both the pre- and post-reform periods. The average scale efficiency of the National, New India, Oriental and United India general insurance companies was 97.1 per cent, 98.7 per cent, 96.8 per cent and 97 per cent respectively during the pre-reform period, while during the postreform period it was 99.1 per cent, 92.6 per cent, 97.6 per cent and 98.0 per cent respectively. As is evident from the table, the average scale efficiency of the National, Oriental and United India general insurance companies has improved, whereas in the case of New India it reduced during the post-reform period. No clear trend in the scale efficiency was seen during the period 199394 to 2007-08. National insurer recorded an efficiency score of 1 during the year 1993-94 in the pre-reform period, and 2003-04 to 2006-07 in the postreform period. The company enjoyed constant return to scale during these years. New India exhibited scale efficiency of 100 per cent for two years, i.e., 1993-94 and 1994-95 in the pre-reform period, and again for three years, i.e., 2005-06 to 2007-08 in the post-reform period. The study also finds that in the post-reform period, public insurers either enjoyed constant return to scale or decreasing return to scale. On the other hand, in the pre- reform period, the public insurers enjoyed all types of return to scale, i.e., increasing return to scale, constant return to scale and decreasing return to scale.

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Model III Out put : Claim Input : Operating Expenses (Including commission) and Capital Table 5.16 Technical Efficiency (Constant Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Periods (Output: Claim)
Year National Pre-reform Period 1993-94 0.907 1994-95 1.000 1995-96 0.552 1996-97 0.584 1997-98 0.759 1998-99 0.636 1999-00 0.584 0.717 Mean Post-reform Period 2000-01 0.613 2001-02 0.615 2002-03 0.852 2003-04 0.918 2004-05 0.853 2005-06 1.000 2006-07 0.896 2007-08 0.900 0.831 Mean New India 0.905 1.000 0.649 0.631 0.563 0.537 0.485 0.681 0.484 0.482 0.876 0.707 0.692 0.777 0.622 0.670 0.664 Oriental 0.952 1.000 0.763 0.840 0.797 0.836 0.670 0.837 0.736 0.904 1.000 0.812 0.889 0.831 0.896 0.940 0.876 United India 0.981 1.000 0.834 0.842 0.791 0.690 0.671 0.830 0.732 0.606 1.000 0.780 0.747 0.658 0.610 0.616 0.719 MEAN 0.936 1.000 0.700 0.724 0.728 0.675 0.603 0.766 0.641 0.652 0.932 0.804 0.795 0.817 0.756 0.782 0.772

Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00.

Table 5.16 presents the technical efficiency (CRS) of the four public sector general insurance companies under study in the pre- and post-reform periods. The average technical efficiency (CRS) of the National, New India, Oriental and United India insurers was 72.0 per cent, 68.1 per cent, 83.7 per cent and 83.0 per cent respectively during the pre-reform period, while during the post-reform period it was 83.1 per cent, 66.4 per cent, 87.6 per cent and 71.9 per cent respectively. As is evident from the table that the average

technical efficiency of the National and Oriental companies was higher during the post-reform period than the pre- reform period. However, the average
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technical efficiency of New India and United India companies was higher during the pre-reform period than the post-reform period. National Insurance company exhibited 100 per cent efficiency during the period 1994-95 and 2005-06, New India during the year 1994-95, Oriental during the period 199496 and 2002-03, and United India during the period 1994-95 and 2002-03. The average technical efficiency of National and Oriental companies increased by 11.4 per cent and 3.9 per cent respectively, while that of New India and United India reduced by 1.7 per cent and 11.1 per cent respectively. The reforms adversely affected the efficiency of New India and United India companies, whereas National and Oriental companies showed better efficiency during the post-reform period. Table 5.17 Technical Efficiency (Variable Return to Scale) of Public Sector General Insurance Companies in the Pre- and Post-reform Periods (Output: Claim)
Year National Pre-reform Period 1993-94 1.000 1994-95 1.000 1995-96 0.568 1996-97 0.602 1997-98 0.813 1998-99 0.683 1999-00 0.635 0.757 Mean Post-reform Period 2000-01 0.673 2001-02 0.655 2002-03 0.867 2003-04 0.921 2004-05 0.863 2005-06 1.000 2006-07 0.935 2007-08 0.954 0.859 Mean New India 1.000 1.000 0.684 0.686 0.713 0.702 0.674 0.780 0.709 0.699 1.000 0.825 0.846 1.000 0.953 1.000 0.879 Oriental United India 1.000 1.000 0.765 0.848 0.823 0.870 0.722 0.861 0.774 1.000 1.000 0.868 0.932 0.919 1.000 1.000 0.937 1.000 1.000 0.869 0.865 0.803 0.802 0.843 0.883 0.951 0.852 1.000 0.857 0.931 0.946 0.946 1.000 0.935 MEAN 1.000 1.000 0.722 0.750 0.788 0.764 0.719 0.820 0.777 0.802 0.967 0.868 0.893 0.966 0.959 0.989 0.902

Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00.

The pure technical efficiency of the four public sector insurance companies under study observed during the pre- and post-reform periods has been exhibited in Table 5.17. The average pure technical efficiency of the

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National, New India, Oriental and United India companies during the prereform period was 75.6 per cent, 78.0 per cent, 86.1 per cent and 88.3 per cent respectively, whereas during the post-reform period it was 85.9 per cent, 87.9 per cent, 93.7 per cent and 93.5 per cent respectively. It is clear from the table that the public insurers improved their efficiency during the post-reform period as compared to the pre-reform period. Year-wise and company-wise analysis reveals that the National Insurance Company exhibited 100 per cent efficiency during the period 1993-95 in the pre-reform period and during 2005-06 in the post-reform period. Table 5.18 Scale Efficiency of Public Sector General Insurance Companies in the Preand Post -reform Period (Output: Claim)
New United New United Year National India Oriental India MEAN National India Oriental India Pre-reform Period 1993-94 0.907 0.905 0.952 0.981 0.936 irs irs irs irs 1994-95 1.000 1.000 1.000 1.000 1.000 crs crs crs crs 1995-96 0.973 0.949 0.998 0.959 0.970 drs drs drs irs 1996-97 0.971 0.920 0.990 0.974 0.964 drs drs drs irs 1997-98 0.933 0.789 0.968 0.985 0.919 drs drs drs drs 1998-99 0.931 0.765 0.960 0.861 0.880 drs drs drs drs 1999-00 0.921 0.719 0.928 0.796 0.841 drs drs drs drs 0.948 0.864 0.971 0.937 0.930 Mean Post-reform Period 2000-01 0.910 0.683 0.950 0.770 0.828 drs drs drs drs 2001-02 0.939 0.689 0.904 0.712 0.811 drs drs drs drs 2002-03 0.983 0.876 1.000 1.000 0.965 drs drs crs crs 2003-04 0.997 0.936 0.910 0.925 drs drs drs drs 0.858 2004-05 0.989 0.818 0.954 0.803 0.891 drs drs drs drs 2005-06 1.000 0.777 0.904 0.695 0.844 crs drs drs drs 2006-07 0.958 0.653 0.896 0.646 0.788 drs drs drs drs 2007-08 0.943 0.670 0.940 0.616 0.792 drs drs drs drs 0.965 0.753 0.936 0.769 0.856 Mean Source: Compiled from Annual Reports of IRDA from 2000-01 to 2007-08. Annual Reports of Public Sector General Insurance Companies from 1993-94 to 1999-00. (crs) refers to constant return to scale, (drs) decreasing return to scale and (irs) increasing return to scale.

As per table 5.17, the National Insurance company showed least efficiency of 56.8 per cent during the year 1995-96 in the pre-reform period. New India company recorded 100 per cent efficiency during the years of 199395 in the pre-reform period and again during 2002-03, 2005-06 and 2007-08 in the post-reform period. It showed least efficiency of 67.4 per cent in the year
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1999-00. Oriental company registered 100 per cent efficiency during 1993-95 in the pre-reform period and again during 2001-03 and 2006-08 in the postreform period. United India showed 100 per cent efficiency during 1993-95 and 2002-03 and 2007-08. Thus, the reforms have certainly improved the efficiency of all the public sector general insurance companies. The scale efficiency of the four public insurers under study observed during the pre- and post-reform periods is presented in Table 5.18. As per the results, the average scale efficiency of National, New India, Oriental and United India general insurance companies was 94.8 per cent, 86.4 per cent, 97.1 per cent and 93.7 per cent during the pre-reform period, while during the post-reform period it was 96.5 per cent, 75.3 per cent, 93.6 per cent and 76.9 per cent respectively. The analysis shows that during the year 1994-95 all the public insurers attained efficiency score of one and enjoyed constant return to scale. Except in the year 1994-95, National exhibit scale efficiency score was one in the year 2005-06, Oriental in the year 1995-96 and 2002-03 and United India in the year 2002-03 only. Thus, during these years, these general insurance companies enjoyed constant return to scale. The average scale efficiency of National company in the post-reform period was higher than the pre-reform period. The study also pointed out that in the post-reform period, most of the public insurers showed a decreasing return to scale, whereas only some of them showed an increasing return to scale. In the pre-reform period, the public insurers mostly showed a decreasing return to scale but in a few years they also showed an increasing return to scale and constant return to scale. The efficiency analysis of the four public sector general insurance companies in the pre- and post-reform periods, using three different models of output revealed that the two models, namely, premium output model and claim output model produced almost the same results. Under these two models, the technical efficiency of National Insurance Company under both CRS & VRS, and scale efficiency of post-reform period is higher than that of the pre-reform period. New India and United exhibited higher technical efficiency under CRS
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and scale efficiency in the pre-reform period than the post-reform period and pure technical efficiency in the post-reform period is higher than that of the pre-reform period of these two insurers. The Oriental showed higher technical efficiency under CRS and VRS in the post-reform period than the pre-reform period but the scale efficiency in the pre-reform period is higher than that of the post-reform period. The study also brought out that in both the periods the public insurers mostly enjoyed a decreasing return to scale. In the premium and investment income output model, three public insurers, namely, National, Oriental and United India exhibited higher efficiency in the post- reform period than the pre-reform period in terms of technical efficiency under CRS & VRS, and scale efficiency. New India showed higher pure technical efficiency in the post-reform period than the prereform period. On the basis of above analysis, it can be said that the reforms have a positive impact on the efficiency of the public insurers, and the hypothesis assumed is accepted. It means that the efficiency of the public sector general insurance companies is higher in the post-reform period than the pre-reform period. 5.5. Productivity Analysis of Indian General Insurance Industry Productivity is the key indicator of economic progress either for nation or for a particular industry. Moreover, it is closely associated with standard of living. To enhance the standard of living depends on continuous increase in productivity of the system that provides goods and services. The growth in productivity is one of the most important factors that have contributed to the advancement of nations. It is the heart of an economy. The higher the productivity growth the better will be the share of productivity gains which, in turn, increases the standard of living. Productivity growth means all round prosperity. It leads to efficient utilization of human, material and technological resources. The poor performance of a firm or an industry may result from low and falling productivity. Relatively low and falling productivity means relatively high and rising production cost. So, an organization, which cares for

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productivity is far better than an organization, which does not care for it (Aggarwal, 2003). Concept of Productivity Mali (1978) defines that productivity is the measure of how well resources are brought together in the organization for accomplishing a set of results. Bhatia (1988) explains that productivity is the combination of effectiveness and efficiency. Effectiveness is related to output and efficiency is related to resource utilization. He further explained that productivity may be taken to constitute the ratio of available goods and services to the potential resources of the group community or country. European Productivity Agency (1955) defined productivity as the measure of economy of means. It is a relationship between physical output and one or more physical inputs used in production. Ravisankar, (1996) explained the broader concept of total factor productivity. He explains productivity of labour, capital and also the efficiency with which producers combine those and other factors of production in producing an output. Technical progress, technology usage, managerial efficiency, distribution network etc. are some of the other factors which have a bearing in the case of service sector. Miller and Schmidt (1984) state that productivity is a concept that concerns how well concerns use the resources. Essentially, it is the ratio between level of output of the system and the level of the input resources required to achieve that output. According to Frenskey (1968), productivity can be explained in five different ways: (i) It is the forum of efficiency; (ii) It is the utility of resources; (iii) It is the ratio rather than phenomenon; (iv) It is the measure of some kind; and (v) It is the rate of return. 5.6 Measurement of Productivity Growth Numerous methodologies for measuring productivity have been developed over the last three decades. The commonly accepted indices of productivity change are Tornqvist Index, Fisher Ideal Index and Malmquist Index. The popularity of Tornqvist and Fisher Ideal indices results from two desirable features they share. Firstly, both can be calculated directly from price and quantity data, and it is not necessary to recover the structure of the

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underlying best practice production frontier, and how it shifts over time whether by using econometric techniques to estimate the parameters of functions characterizing the frontier or by using mathematical programming techniques to construct the frontier. Secondly, both are consistent with flexible representations of the frontier, i.e., both are superlative indices. The popularity of Malmquist Index stems from three quite different sources. Firstly, it is calculated from quantity data only, a distinct advantage if price information is unavailable or if prices are distorted. Secondly, it rests on much weaker behavioural assumptions than the other two indices, since it does not assume cost minimizing or revenue maximizing behaviour. Thirdly, provided panel data is available, it provides a decomposition of productivity change into two components. One is labelled technical change, and it reflects improvement or deterioration in the performance of best practice

manufacturing industries. The other is labelled technical efficiency change, and it reflects the convergence toward or the divergence from best practice on the part of the remaining firms. The value of the decomposition is that it provides information on the source of overall productivity change in the firms. The study implement the Malmquist Index by solving a series of linear programming problems to construct the distance functions that make up the Malmquist Index. These distance functions characterize the best practice frontier at any point in time, and they also characterize shifts in the frontier over time as well as movements towards or away from the frontier. The productivity change of one activity may be due to two components: an efficiency change or a technological change. Consequently, the Malmquist Index of productivity change, TFPC, is obtained as the product of two factors, that is, efficiency change (EC), and technological change (TC). TFPC = EC x TC Efficiency Change: Efficiency change is obtained as the ratio between efficiency scores achieved in periods t + 1 and t. Technological Change: The modern economists emphasize the catalytic role that technological changes play in the growth of an economy.

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Technological change is a prime mover of economic growth. It refers to the changes in the input-output relations of production activities (Mathur, 1963). As the economy moves from lower to higher stages of development, there occurs a shift from simpler to more modern and complicated techniques of production. Technological changes bring about an increase in income, either by reducing the amount of inputs per unit of output or by yielding more output for a given amount of input (Leontief, 1963). This shift requires different, as well as skill sets much higher level of skill, sets targeted to achieve efficiency in production or service delivery systems. Technological change is a measure of the shift in the frontier over the two periods (Donni and Fecher, 1997). The value of Index>1 shows that insurers are more dynamic in the adoption of new technology (Singh and Kumar, 2005). A value of less than 1 in the index indicates a regress in productivity, equal to 1 indicates stagnation and greater than 1 indicates a productivity growth between period t and t+1 from the perspective of period t. 5.7 Comparative Productivity Analysis of the Public and Private Sector General Insurance Companies in the Post-reform Period Model-I Output : Premium Input : Capital and Operating Expenses (Including Commission) Table 5.19 Malmquist Growth in Technical Efficiency Index of General Insurance Companies in the Post-reform Period (Output: Premium)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.000 0.659 0.805 0.685 0.776 1.056 0.354 0.960 0.992 1.000 2.292 4.256 3.732 1.377 2004-05 0.868 0.908 0.742 0.770 0.819 0.896 2.164 0.998 1.064 1.000 1.000 1.622 1.048 1.170 2005-06 1.065 1.107 0.972 0.925 1.015 1.243 1.179 0.974 0.852 1.000 0.934 1.150 0.947 1.027 2006-07 0.852 1.096 1.215 1.129 1.064 1.234 1.106 0.906 0.985 1.000 1.016 0.923 0.955 1.011 2007-08 1.004 1.278 1.066 1.236 1.140 0.991 0.776 1.182 1.029 1.000 1.054 1.440 1.303 1.080 Mean 0.954 0.985 0.945 0.926 0.952 1.075 0.951 1.000 0.982 1.000 1.180 1.602 1.357 1.126

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

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Table 5.19 shows the technical efficiency change of the public and private sector general insurers over the sample period. Again, the numbers reported are geometric means across the insurers in the sample. The results indicate decline in average technical efficiency change in the years 2003-04 and 2004-05 in the case of public sector, whereas improvement from 2005-06 to 2007-08. Overall, the average technical efficiency of the public sector has declined by average 5 per cent per annum. The efficiency change results imply that the public insurers became less efficient (average efficiency change: 0.95<1). All the public insurers, viz. National, New India, Oriental and United India have shown a decline in efficiency change of 4.6 per cent, 1.5 per cent, 5.5 per cent and 6.4 per cent respectively. On the other hand, the private sector has shown a positive growth in efficiency change over the period of study. The average efficiency of the private sector has improved by 12.6 per cent. Table 5.20 Malmquist Growth in Technology Index of General Insurance Companies in the Post-reform Period (Output: Premium)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 2004-05 2005-06 2006-07 2007-08 Mean 1.061 1.193 0.975 1.003 0.973 1.038 1.158 1.159 0.923 1.089 0.845 1.027 0.993 1.210 1.002 0.978 0.874 1.006 1.116 1.191 0.968 1.056 0.845 1.028 1.080 1.188 0.967 1.031 0.883 1.025 1.155 1.190 0.985 1.019 1.110 1.089 2.664 0.555 0.825 1.089 0.951 1.048 1.323 1.136 0.957 0.997 0.935 1.061 1.122 1.209 0.975 0.987 1.074 1.070 1.103 1.231 0.993 0.945 1.039 1.058 2.791 0.009 0.897 1.044 0.847 0.461 1.437 0.976 0.834 1.076 0.940 1.034 1.377 1.173 0.989 0.934 0.901 1.061 1.515 0.572 0.929 1.010 0.971 0.955

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

As per table 5.19, among the private insurers, Cholamandalam has shown the highest gain of 60 per cent followed by HDFC Chubb showing a gain of 35.7 per cent in technical efficiency. TATA AIG, and Reliance have indicated a decline in efficiency of 2 per cent and 5 per cent respectively. However, in the case of IFFCO-Tokio and Bajaj Allianz, the average technical
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efficiency remained the same during the period. Overall, the private sector has registered a gain in the efficiency level in the post-reform period, whereas the efficiency level of the public sector has deteriorated. The analysis also reveals that there is a large disparity of efficiency change among the private insurers. The table 5.20 reveals that the public sector general insurance companies made technological progress during the years 2003-04, 2004-05 and 2006-07, while a decline was witnessed during the years 2005-06 and 2007-08. The data pertaining to the technological growth attained by the public and private sector general insurance companies under study in the post-reform period has been presented in Table 5.20. The mean technological progress of the public sector insurers is 2.5 per cent. All the public sector insurers

preferred to go for the technological change. On the other hand, the private sector insurers made technological progress during the years 2003-04 and 2006-2007, while a regress was witnessed during the years 2004-2005, 2005-06 and 2007-2008. ICICI Lombard lagged behind all the private insurers showing a decline of 54 per cent in the technological change. All other private insurers recorded a gain in technical change. Table 5.21 Malmquist Total Factor Productivity Index of General Insurance Companies in the Post-reform Period (Output: Premium)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.061 0.763 0.799 0.764 0.838 1.219 0.943 1.270 1.113 1.103 6.396 6.117 5.139 2.087 2004-05 1.035 1.053 0.898 0.916 0.973 1.066 1.200 1.135 1.286 1.231 0.009 1.583 1.229 0.669 2005-06 1.038 1.022 0.974 0.895 0.981 1.225 0.973 0.932 0.831 0.993 0.838 0.959 0.936 0.955 2006-07 0.854 1.193 1.189 1.192 1.096 1.258 1.205 0.904 0.972 0.945 1.061 0.993 0.891 1.021 2007-08 0.976 1.080 0.932 1.044 1.006 1.100 0.738 1.106 1.105 1.039 0.892 1.353 1.173 1.048 Mean 0.990 1.011 0.950 0.952 0.975 1.171 0.996 1.061 1.050 1.058 0.544 1.657 1.440 1.075

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

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As per table 5.20, among the private insurers, Royal Sundaram progressed at the highest rate of 8.9 per cent followed by TATA AIG showing a progress of 7.0 per cent. However, in the year 2005-06 all the private insurers showed a decline in technical change. Overall, both the public and private sector insurers progressed technologically except ICICI Lombard which recorded the highest decline of 99 per cent in technological change during the year 2004-05. Table 5.21 presents the Malmquist productivity indices of the public and private sector general insurance companies. Unlike the technical efficiency results which are based on the frontier for an indicated year, the Malmquist indices and their components compare changes arising in two years period ending in the indicated year. As is evident from the table, public sector general insurance companies showed improvement in their productivity during the period 2006-07 and 2007-08. The geometric mean of productivity change of the public sector for the period 2003-04 to 2007-08 is 0.975 indicating that productivity declined by 2.5 per cent per year during the period. The geometric mean of the New India Insurance Company from 2003-04 to 2006-07 was 1.011, indicating productivity average increase of 1.1 per cent per annum, while all other public insurers showed a decline in productivity from 2003-04 to 2007-08. The geometric mean productivity change in the case of Oriental and United India companies was 95 and 952 respectively, indicating that productivity declined by about 5 per cent per annum on average during the period. On the other hand, the private insurers showed improvements in

productivity in 2003-04, 2006-07 and 2007-08. The geometric mean in the case of private insurers in the year 2003-04 was 2.087, registering the highest productivity growth rate of 109 per cent, while in the year 2004-05 it was 0.669, recording maximum decline of about 33 per cent in productivity. The geometric mean of 1.07 in the case of all the private insurers during the study period indicated 7.5 per cent progress in productivity. Among the private insurers, Reliance and ICICI Lombard showed a decline in productivity, whereas all other private insurers recorded progress in productivity.

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Cholamandalam exhibited the highest growth of 65.7 per cent followed by HDFC Chubb with 44 per cent growth in productivity during the study period. The study provides that in the case of public insurers, a 5 per cent decline in technical efficiency is partially offset by a 2.4 per cent improvement in technology change which resulted in a overall reduction of 2 per cent in total factor productivity. On the other hand, the decline of 2 per cent in

technological change of the private insurers was being compensated by the 12.5 per cent improvement in efficiency change which resulted into overall 7.5 per cent growth in total factor productivity of the private sector. The fall in productivity of the public insurers over the period is attributable to technical efficiency change. Model II Output: Premium and Investment Income Input: Capital and Operating Expenses (Including Commission) Table 5.22 Malmquist Growth in Technical Efficiency Index of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 2004-05 2005-06 2006-07 2007-08 Mean 1.000 1.000 1.000 1.000 1.000 1.000 0.804 1.116 1.275 1.000 1.000 1.027 1.000 1.000 1.000 1.000 1.000 1.000 0.940 0.954 1.115 0.981 1.019 1.000 0.932 1.016 1.092 0.995 1.005 1.007 1.047 0.896 1.243 1.234 0.991 1.074 0.717 1.294 1.077 1.000 0.776 0.951 0.960 0.998 0.974 0.924 1.159 1.000 0.995 1.079 0.842 0.987 1.022 0.982 1.000 1.000 1.000 1.000 1.000 1.000 2.163 1.000 1.000 0.989 1.011 1.167 1.415 1.349 1.205 0.913 1.390 1.239 3.535 1.033 0.975 0.955 1.264 1.339 1.292 1.072 1.032 0.996 1.062 1.086

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

Table 5.22 shows the technical efficiency change of the public and private sector general insurance companies over the sample period. The table carries the geometric means across the insurers in the sample. The results indicate that there is a decline of 7.7 percent per annum in technical efficiency change of the public insurers in the year 2003-04. However, in all other years,
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public insurers showed improvement in technical efficiency over the previous years. The geometric mean of technical efficiency change of the public

insurers is 1.007 which indicates about marginal gain of 1 per cent in their efficiency change. The geometric mean of efficiency change of National, Oriental and United India companies is 1, which indicates that efficiency change of these three public sector insurers remained the same during the sample period. The results show that the geometric mean of efficiency change of the private insurers is 1.086, indicating 8.6 per cent improvement in efficiency level. Among the private insurers, HDFC Chubb exhibited geometric mean of efficiency change as 1.34, indicating the highest progress of 34 per cent during the study period followed by Cholamandalam which recorded 24 per cent growth in efficiency change during the study period. Among the private insurers, Reliance and TATA AIG exhibited mean technical efficiency of 0.95 and 0.98 respectively, indicating 5 per cent and 2 per cent decline in efficiency level during the study period. It has been found that the efficiency progress of the private sector is higher than that of the public sector general insurance companies. However, Reliance and Tata AIG showed no change in their efficiency level. Table 5.23 Malmquist Growth in Technology Index of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.035 1.060 1.203 1.066 1.089 1.139 0.761 1.309 1.119 1.102 2.597 0.989 1.071 1.183 2004-05 1.006 1.008 1.005 1.069 1.022 1.186 0.520 1.136 1.174 1.205 0.009 0.868 1.162 0.555 2005-06 1.187 0.927 0.917 0.983 0.998 0.985 0.967 0.956 0.982 0.992 0.846 0.805 0.973 0.936 2006-07 0.945 1.143 1.105 1.039 1.055 1.021 1.010 1.004 0.986 0.947 1.041 1.047 0.956 1.001 2007-08 0.987 1.055 0.915 1.052 1.001 1.114 0.951 0.951 1.083 1.050 0.900 0.957 0.920 0.988 Mean 1.029 1.036 1.023 1.041 1.032 1.086 0.818 1.063 1.066 1.056 0.450 0.929 1.013 0.905

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

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Table 5.23 carries the data showing the technological change of the public and private sector general insurance companies in the post-reform period. The table reveals that all the public insurers made technological progress during the study period. In their case, the geometric mean of technological change is 1.03, which means that these companies

technologically made a progress of average 3 per cent per annum over the period. The results of the private sector companies showed technological

regress in 2004-05, 2005-06 and 2007-08. The geometric mean of technological change in the case of private sector is 0.91, indicating 9 per cent regress in technological change. All private insurers did not exhibit regress in technological change. ICICI Lombard showed the highest decline followed by Reliance and Cholamandalam. All other private insurers showed technological progress over the study period. Overall, the results indicate that in the postreform period, the public sector companies showed technological progress, while their counterparts showed regress in technological change. Table 5.24 Malmquist Total Factor Productivity Index of General Insurance Companies in the Post-reform Period (Output: Premium and Investment Income)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.035 0.852 1.203 1.002 1.015 1.193 0.546 1.256 1.113 1.102 5.619 1.400 3.786 1.529 2004-05 1.006 1.125 1.005 1.020 1.038 1.062 0.672 1.135 1.266 1.205 0.009 1.171 1.201 0.595 2005-06 1.187 1.182 0.917 1.096 1.090 1.225 1.041 0.931 0.826 0.992 0.846 0.970 0.948 0.966 2006-07 0.945 1.143 1.105 1.019 1.050 1.259 1.010 0.927 0.973 0.947 1.030 0.956 0.913 0.997 2007-08 0.987 1.055 0.915 1.072 1.005 1.104 0.738 1.103 1.107 1.050 0.910 1.330 1.163 1.049 Mean 1.029 1.064 1.023 1.041 1.039 1.166 0.778 1.063 1.046 1.056 0.526 1.151 1.356 0.983

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

As per table 5.23, this decline in technological change implies that private insurers need more inputs to produce their outputs at the end of the study period than at the beginning. The analysis reveals that in a dynamically
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changing environment many private insurers adopted new approaches to increase their outputs. In this effort, some of the companies made wrong choice in the selection of technology, which resulted into excessive consumption of inputs. So, the private insurers must improve their technology carefully in this competitive environment. Table 5.24 shows the Malmquist productivity indices of the public and private sector general insurance companies in the post-reform period. It is evident from the table that public sector insurance companies showed improvement in their productivity during the period 2003-04 to 2007-08. The geometric mean of productivity change of the public sector insurers is 1.04 which reflects average 4 per cent improvement in their productivity during the study period. Among the public sector insurers, the geometric mean of

productivity change in the case of New India company is 1.064, which explains that the company exhibited maximum progress of 6.4 per cent in its productivity during the study period. The geometric mean of productivity change in the case of private insurers during the years 2004-05 and 2005-06 is 0.59 and 0.97 respectively which shows a decline in productivity of 41 per cent and 3 per cent respectively as compared to the previous years. The geometric mean of the total factor productivity change of the private insurers is 0.98 which shows just 2 per cent regress in productivity. There is a large disparity in the productivity change among the private insurers. ICICI Lombard and Reliance exhibited productivity change means of 0.526 and 0.778 which explains a decline in productivity of 47 per cent and 22 per cent respectively. However, all other private sector insurers recorded progress in productivity. It has been found that the decline of 9.5 per cent in the technological change of the private insurers is being compensated by 9 per cent progress in efficiency change which resulted into 2 per cent regress in overall total factor productivity of the private sector during the study period.

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Model III Output : Claim Input : Capital and Operating Expenses including Commission Table 5.25 Malmquist Growth in Technical Efficiency Index of General Insurance Companies in the Post-reform Period (Output: Claim)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.028 0.714 0.748 0.773 0.807 1.349 0.405 1.494 1.103 0.999 4.840 16.255 11.205 2.304 2004-05 1.000 1.270 1.261 1.140 1.162 1.181 2.428 1.214 1.228 1.226 1.000 3.163 2.362 1.582 2005-06 2006-07 2007-08 Mean 1.000 1.000 1.000 1.006 1.054 1.095 1.143 1.036 0.829 1.278 0.981 0.996 0.806 1.136 1.025 0.962 0.916 1.123 1.035 1.000 0.868 1.445 1.079 1.166 0.938 0.668 1.102 0.926 0.852 1.175 1.063 1.141 0.852 1.106 1.025 1.055 1.118 0.854 1.091 1.050 0.815 1.172 1.046 1.371 1.044 0.624 1.333 2.138 0.784 0.996 1.351 1.946 0.903 0.969 1.130 1.292

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

The technical efficiency change of both the public and private sector general insurance companies over the study period has been presented in Table 5.25. Again, the number reported is the geometric means across the insurers in the sample. There has been a decline in mean technical efficiency change of the public sector insurers in the years 2003-04 and 2005-06. The geometric mean in the case of all the public sector insurers is 1. It shows that the technical efficiency change of public sector insurers remained almost the same during the study period. Only United India company from the public sector showed 4 per cent decline in its efficiency change. The results presented in the table explain that the general insurance companies belonging to the private sector showed growth in technical efficiency during the period 2003-04, 2004-05 and 2007-08, while the decline during 2005-06 and 2006-07. The geometric mean of all the private insurers is 1.29, which implies an improvement of 29 per cent in the efficiency level. Among the eight private insurers, only Reliance showed a decline in efficiency change, while all other private insurers showed an improvement in efficiency change. The geometric mean of efficiency change in

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the case of Cholamandalam is 2.14, indicating the highest improvement of 114 per cent followed by HDFC Chubb which showed 95 per cent growth in efficiency. The results establish the fact that there has been growth in the technical efficiency of the companies under study in the post-reform period. Table 5.26 Malmquist Growth in Technology Index of General Insurance Companies during the Post-reform Period (Output: Claim)
Name of the Company 2003-04 2004-05 2005-06 2006-07 2007-08 Mean National 1.082 0.953 1.253 0.785 1.047 1.012 New India 0.951 0.838 1.089 0.999 1.047 0.981 Oriental 1.080 0.931 1.130 0.976 1.027 1.026 United India 0.947 0.867 1.110 0.995 1.047 0.990 1.013 0.896 1.144 0.934 1.042 1.002 Mean Royal Sundaram 0.949 0.866 1.131 0.749 1.090 0.947 Reliance 1.654 0.434 1.039 0.999 1.069 0.955 Iffco-Tokio 1.072 0.815 1.105 0.979 1.014 0.992 Tata AIG 0.985 0.939 1.162 0.871 1.090 1.004 Bajaj Allianz 1.008 0.902 1.130 0.933 1.060 1.003 ICICI Lombard 1.851 0.007 1.076 0.991 1.047 0.434 Cholamandalam 1.140 0.700 1.044 0.999 1.063 0.976 HDFC Chubb 1.088 0.850 1.119 0.963 1.019 1.003 1.183 0.426 1.100 0.932 1.056 0.887 Mean
Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

The technological change of the public and private sector general insurance companies observed during the post-reform period has been shown in Table 5.26. The table reveals that the public sector general insurance

companies showed technological growth during the period 2003-04, 2005-06 and 2007-08, while a regress during 2004-05 and 2006-07. The mean

technological change of New India and United India is 0.981 and 0.990 respectively, which exhibited a decline of 2 per cent and 1 per cent respectively. The mean technological change of all the public insurers is 1.0, which signifies that there was no technological change. The private sector insurers exhibited technological progress during the period in their case 200304, 2005-06 and 2007-08, while a regress during 2004-05 and 2006-07. The geometric mean of all the private insurers during the study period is 0.89, indicating 11 per cent decline in technological change. Among the private insurers, Bajaj Allianz, TataAIG and HDFC Chubb progressed

technologically, while the remaining private insurers exhibited technological

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regress during the study period.

The private insurers experienced highest

decline in technological change in the year 2004-05. Table 5.27 Malmquist Total Factor Productivity index of General Insurance Companies during the Post-reform Period (Output: Claim)
Name of the Company National New India Oriental United India Mean Royal Sundaram Reliance Iffco-Tokio Tata AIG Bajaj Allianz ICICI Lombard Cholamandalam HDFC Chubb Mean 2003-04 1.112 0.679 0.808 0.732 0.817 1.280 0.670 1.601 1.087 1.007 8.959 18.525 12.185 2.725 2004-05 0.953 1.064 1.175 0.988 1.042 1.023 1.054 0.990 1.153 1.106 0.007 2.215 2.009 0.674 2005-06 1.253 1.147 0.937 0.894 1.047 0.983 0.975 0.942 0.990 1.264 0.877 1.090 0.877 0.993 2006-07 0.785 1.094 1.247 1.130 1.049 1.083 0.667 1.151 0.964 0.797 1.162 0.623 0.959 0.903 2007-08 1.047 1.197 1.008 1.073 1.079 1.177 1.177 1.078 1.118 1.157 1.096 1.418 1.376 1.194 Mean 1.018 1.016 1.022 0.952 1.002 1.104 0.884 1.131 1.060 1.053 0.595 2.086 1.952 1.146

Source: Compiled from Annual Reports of IRDA from 2002-03 to 2007-08.

Table 5.27 examines the Malmquist productivity indices of the public and private sector general insurance companies. The results exhibit an improvement in the productivity of public insurers from 2004-2005 to 2007-08 and a decline only in the year 2003-04. The private insurers exhibited progress in productivity during the period 2003-04 and 2007-08 and a decline during the years 2004-05 to 2006-07. The geometric mean of all the public insurers is 1.002, which means that a slight improvement in productivity was visible at the beginning of the period to the end of the study period. On the other hand, mean of total factor productivity change of the private insurers is 1.15, which reveals 15 per cent growth in productivity. It is evident from the study that the private insurers have shown better productivity results than the public sector. The study also concludes that the decline in technological change of the private insurers is being compensated by the improvement in efficiency change which resulted into overall improvement in productivity of the private insurers.

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It has been found that different output models have produced different productivity results during the post-reform period. The Premium Output Model exhibited that the public insurers showed 4.8 per cent regress in efficiency change and 2.5 per cent progress in technology which resulted into overall 2.5 per cent decline in total factor productivity change. On the other hand, the private insurers exhibited 12.6 per cent progress in efficiency change and 4.5 per cent regress in technological change which resulted into 7.5 per cent improvement in total factor productivity. As per the Premium and Investment Income Output Model, the public insurers exhibited 0.7 per cent progress in efficiency change and 3.2 per cent progress in technological change, which resulted into 3.9 per cent growth in total factor productivity. Among the private insurers, there is 8.6 per cent improvement in efficiency and 9.5 per cent regress in technological change leading to 1.7 per cent decline in total factor productivity. As per the Claim as Output Model, the public insurers exhibited almost the same level of efficiency change, technological change and total factor productivity, whereas the private insurers showed an improvement of 29.2 per cent in efficiency change and a decline of 11.3 per cent in

technological change which resulted into 14.6 per cent progress in total factor productivity. Among the private insurers, ICICI Lombard and Reliance exhibited the highest decline in total factor productivity. On the whole, it is observed that but for ICICI Lombard and Reliance, other private insurers exhibited higher improvement in productivity change than the public insurers during the post-reform period as per Premium Output and Claim Output Models. The results highlight that the private insurers produced more outputs with the same level of inputs at the end of the study period than at the beginning as compared to the public insurers, whereas in the case of two private insurers, namely, ICICI Lombard and Reliance, it looks that these two insurers made a wrong choice while adopting the new technology and scale of operation which perhaps led to produce lesser outputs. However, after gaining experience by operating in the new environment and overcoming the initial shortcomings in the adoption of new technology and correcting the
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scale of operation, the productivity of these two insurers can also be improved. Therefore, the hypothesis is accepted that the productivity of private sector is higher than that of the public sector during the post-reform period as per Premium Output Model and Claim Output Model.

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