Determinants of Efficiency in the Insurance Industry of Ghana

Abstract

Ghanaians do not ordinarily purchase insurance due to their perception of low performance of the insurance companies in Ghana. An attempt to revert this mindset by insurers has resulted into an intense competition, price cutting, high management expenses, and duplication of functions among others. This make insurers face regular complaints of repudiation of claims, delay in settlement of claims, dispute over quantum, and delay in payment of settled claims. Thus, these interventions rather have been aggravating the perception of Ghanaians, deepening the problem year after year in the industry. This study therefore analyses the overall (cost) efficiencies, and their determinants in the insurance industry of Ghana using an unbalanced panel data on thirty (30) insurers from 2005 to 2014 with both DEA and SFA methodologies. It was observed that insurers operating in the industry operated with 81.2% average cost inefficiencies under the DEA model while the SFA model which separates random errors from inefficiencies reported 53.8% cost inefficiencies. Thus confirming the perception of Ghanaians on the performance of companies in the insurance industry. Life insurers were observed to be more cost efficient than non-life insurers but several parametric and non-parametric tests attributed this observation to their operation in different environments with different technologies. From the results, there exist differences in the choice of methodologies in efficiency analysis. But these observed differences were in terms of relationship of determinants and not in terms of determinants since both methods identified reinsurance, business type, capitalization, firm size, market share and regulation as the determinants of cost efficiency in the Ghanaian insurance industry. Based on the finding, the study recommended among other things that, NIC should endeavor to make the industry less stringent by eliminating all bureaucracies and huge financial demands on reinsurance and cultural based policies like agricultural insurance and micro insurance, to increase cost efficiency in the insurance industry