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Cost efficiency and profitability in Thailand's life insurance industry: A stochastic cost frontier approach

Abd Karim, Mohd Zaini (2005) Cost efficiency and profitability in Thailand's life insurance industry: A stochastic cost frontier approach. International Journal of Applied Econometrics and Quantitative Studies , 2-4. pp. 19-36. ISSN 1988-0081

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Liberalized environments brought about by trade agreements and other restructuring of international markets under the General Agreement on Trade and Services (GATS) have increased market opportunities for foreign firms. This opening up of domestic market under GATS will cause the inflow of foreign insurance firm hence heighten competitive pressures. As such, insurance firm in Thailand need to be efficient to ensure their survival. Hence, the purpose of this paper is to evaluate the cost efficiency and its relationship with profitability in Thailand’s life insurance firms during the period 1997-2002 using the stochastic cost frontier approach. We find that the industry is on average 82 to 140 percent inefficient. There is no significant relationship between inefficiency and age. But, the mean inefficiency is negatively correlated with size suggesting the need for rationalization in the insurance industry in Thailand. Consolidating the large number of smaller insurers should be high on the government’s agenda, and the capital requirements for life insurers need to be increase. We show that inefficiency is negatively correlated with ROE and ROA ratios. This shows that efficient firms, on average, have higher return on equity and on assets. This indicates that inefficiency has substantial effect on the profitability of life insurance companies.

Item Type: Article
Uncontrolled Keywords: Cost efficiency; Profitability; Insurance industry; Thailand
Subjects: H Social Sciences > HD Industries. Land use. Labor
Divisions: College of Arts and Sciences
Depositing User: Prof. Dr. Mohd Zaini Abd Karim
Date Deposited: 25 Nov 2010 03:44
Last Modified: 25 Nov 2010 03:45

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