Efficiency of Insurance Industry in Nigeria: An Application of Data Envelopment Analysis

Abstract

The study sought to establish whether listed insurance firms in Nigeria are technically and scale efficiently. To achieve this goal, the study employed the Non-parametric Data Envelopment Analysis (DEA) with input variables that include total equity, fixed asset and number of staffs while the output variables are revenue, other income and profit before tax. The study period was 2015 - 2016. The STATA DEA software was used to calculate the efficiency score. Findings from the study indicate that in 2015; 5 insurance firms out of the 13 in our sample were efficient based on the constant return to scale (CRS), while 6 are variable return to scale (VRS) efficient whereas, 6 insurance firms were scaled efficiently. Furthermore, in 2016 the result indicates that 3 insurance firms out of the 13 in our sample were efficient based on a constant return to scale (CRS), while 5 are variable return to scale (VRS) efficient whereas, 9 insurance firms were scaled efficiently.  This means that majority of the sampled insurance firms are not successful in converting their inputs to outputs. The study concludes that insurance firms in Nigeria are not optimally performing in terms of converting their inputs to outputs. It is therefore recommended that there is need for the insurance firms to scale down the cost of production through an appropriate strategy. Also, the operation of efficient insurance firms can be the benchmark by inefficient insurance firms.