EFFICIENCY PERFORMANCE OF JAPANESE NON-LIFE INSURERS AND THEIR PORTFOLIO OF INSURANCE POLICIES

Abstract

This studytests how the selection of the insurance underwriting portfolio affects the cost efficiencyof non-life insurers in different market environments. Our investigation spans the 1970-2005 period, covers ten major non-life insurers, and compares pre- and post-deregulation periods. Since portfolio considerations are essential for non-life insurers in making managerial decisions, this studyattempts to clarifythe relationship between insurer efficiencyperformance and their business portfolio. We employan ordered probabilitymodel where the dependent variable is the ranking number of insurer efficiencyderived from a fixed-effect model. Our results reveal that the efficiencyof insurers deteriorates as theydecrease their diversification. This indicates that non-life insurers can successfullyimprove their efficiencybydiversify ing their insurance policyportfolio. The contribution of market share expansion to efficiency performance differs among the various lines of insurance and regulatoryenvironments. Insurers with higher shares in the automobile insurance market tend to be more efficient than those with lower shares. In contrast, increasing the market share in fire insurance maydeteriorate insurer efficiencyin the competitive marketplace after deregulation. Market share expansion of personal accident insurance contributes to efficiencyonlyin the post-deregulation period.