Competition, Cost Efficiency and Solvency of Non-Life Insurers in Ghana

Abstract

This study examines the effect of competition on the solvency of non-life insurers in Ghana. It further examines the role of cost efficiency in the competition- solvency nexus. The study uses firm level yearly data from the National Insurance Commission on 26 non-life insurers from 2008 to 2017. Using ordinary least squares panel corrected standard error, generalized least squares and systems generalized methods of moments, the study reveals that market power (competition) enhances (reduces) cost efficiency. This rejects the quiet life hypothesis. Furthermore, the analysis of the study reveals that market power enhances the solvency of non-life insurers, supporting the competition-fragility hypothesis. Finally, on the role of cost efficiency in the competition-solvency nexus, the findings suggest that market power enhances solvency of non-life insurers through cost efficiency. Investment income and leverage are significant determinants of insolvency while total assets and leverage are significant determinants of cost efficiency. Findings of this study will improve understanding on non-life insurers’ competitive behaviour and its consequences to shape regulatory competition policies for consumer interest while providing a stable insurance market for economic development. Keywords: Competition, Cost Efficiency, Market Power, Solvency, System Generalized Methods of Moments, Underwriting Risk