Technical Efficiency, Risk and Capital Requirement of Insurance Firms in Ghana

Abstract

This study examines the effect of recapitalisation on technical efficiency and risk of life and non-life insurers in Ghana. The study uses balanced panel data for 14 life and 17 non-life insurers from 2008 to 2017. Data is sourced from the annual reports submitted to the National Insurance Commission. The research work evaluates technical efficiency by employing a Data Envelopment Analysis that allows for the addition of multiple inputs and outputs in the production frontier. Both panels fixed effect and random effect models are used to determine the relationship between recapitalisation and technical efficiency. The study also uses a random effect model to determine the relationship between recapitalisation and insurer’s risk. The results show that recapitalisation has a significant positive relationship with technical efficiency, indicating the importance of recapitalisation in improving technical efficiency. Also, there was a significant positive relationship between recapitalisation and the risk of the insurer. This implies that, as the capital requirement of insurers increases, the risk of the insurer increases. The major determinants of technical efficiency of Ghanaian insurers include risk of the insurer, market share and expense ratio. Major determinants of insurance risk in Ghana are the type of insurer, size of the firm as well as the market share of the insurer. Policywise, the findings of this study reinforce the suggestion by the Actuarial Society of Ghana that policymakers and regulators should adopt a risk-based capital system and must continue to initiate, design and model regulations that will help reduce risk and improve technical efficiency of both life and non-life insurers.