Efficiency of NonLife Insurance Business in Kenya: Stochastic Frontier Approach

Abstract

The study investigates the efficiency of nonlife insurance business in Kenya over the period 2006-2012 using stochastic frontier approach and establishes an industry efficiency of 72% over the period. The efficiency scores per year were; 2006 (67%), 2007 (69%), 2008 (61%), 2009 (73%), 2010 (99%), 2011 (73%) and 2012 (69%). Small and medium scale firms are catching up with large scale firms in terms of efficiency. Branch network and county coverage positively influence efficiency. Firms with 21-30 years of age are the most efficient cohort. There is no significant difference in efficiency between specialized nonlife and composite, domestic and foreign owned firms and between firms with regional and national underwriting orientation. Elasticity of the sum of net earned premiums and investment income to changes in commissions expenditure, management expenses and capital ranged between (0.2-0.6), (0.2-0.5) and (0.1-0.3) respectively, over the period. Deviations in profitability and claims paid across firms are wide translating to industry potential for cross-firm reinsurance. The profitability is positively correlated with claims paid across firms indicating sustained industry capacity to settle claims. In order to increase efficiency competitiveness firms should continue expanding their branch network and county coverage across Kenya, increase capitalization and innovate on investment portfolio. Deviations in profitability and underwriting risk across firms point to merging of firms, formation of strong cross-firm reinsurance ties, increasing of insurance penetration and investment returns, and enhancing client risk profiling and customer education on risk prevention as critical strategies towards increasing industry stability and sharing of claims settlement responsibilities.