Measuring Operational Efficiency of the Insurance Industry in Kenya Using Data Envelopment Analysis
Abstract
There has been ever growing concern to measure relative operational efficiency of
Decision Making Units (DMU). Stochastic frontier analysis and Regression have been
the most popular methods used to measure the same. This study examines the use of
Data Envelopment Analysis model to determine the relative operational efficiency of
insurance firms in Kenya. The model used is a multi-variable usage in terms of inputs
versus outputs. The data utilized was for the period between January to December
2010. The input and output data are analyzed using Data Envelopment Analysis
computer program. The objective of this study was to obtain the following information
of each insurance firm: relative efficiency score, peer for each inefficient insurance
firm, objective output and inputs targets, slacks outputs units and surplus inputs.
Finally, relationship between relative efficiency score and to its total assets admitted is
noted.
The study found out that 23 of the efficient insurance firm’s average efficiency score
was one (1) while 12 are inefficient with an efficiency score of 0.6848. Meanwhile,
inefficiency in insurance firms in Kenya is caused by low net insurance premium
earned and larger firms not utilizing assets effectively. The following recommendations
are then made to the insurance industry: the 23 insurance firms should be investigated
and their best practices adopted by its peers, products to be developed aimed at
increasing net earned premium and finally, asset verification exercise should be done to
ensure all assets are productively used and the obsolete ones disposed while excess
deployed to needy insurance firms’ branches.
Citation
Masters in Business AdministrationSponsorhip
The University of NairobiPublisher
University of Nairobi, School of Business