The purpose of this paper is to assess the efficiencies of the Korean life insurers from various perspectives and identify the specific causes of inefficiency experienced by them through the method of DEA (Data Envelopment Analysis). As a nonparametri...
The purpose of this paper is to assess the efficiencies of the Korean life insurers from various perspectives and identify the specific causes of inefficiency experienced by them through the method of DEA (Data Envelopment Analysis). As a nonparametric efficiency measurement method, DEA has been widely used in measuring the relative efficiencies of decision making units (DMUs) in public and service sectors where the price information on input and output factors are not readily available, and it provides diverse efficiency-related information such as technical efficiencies, returns to scale, optimal production scales of individual DMUs. Using the real data of 33 life insurers operating in Korea over the period of 1990 through 1997, we conducted a series of detailed efficiency analyses from various perspectives, and identified the specific causes of inefficiency in the Korean insurance industry. It was found that domestic insurers had experienced notable inefficiency, which was mainly caused by their huge amount of business expenses following the physical expansion of their businesses. Specifically, the major factors causing the inefficiency of the domestic insurers in 1997, according to the cross-sectional analysis, turned out to be collection expenses and the number of branch offices. According to the longitudinal analysis over the period of 1990 through 1997, on the other hand, it was shown that collection expenses, new business expenses, and maintenance expenses had been the most uncontrolled factors; and hence they were identified as the major causes of inefficiency from long-term perspective. We recommend from the result that operating expenses such as collection expenses, new business expenses, and maintenance expenses should be more properly managed for the Korean life insurance industry to improve their productive efficiency while individual domestic insurers should make every effort to downsize their operations in pursuit of reducing their collection expenses and number of branch offices.