The Journal of Risk Finance

Analyzing the technical efficiency of insurance companies in GCC

Khalid Al-Amri Said Gattoufi Saeed Al-Muharrami
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JRF
13,4
362
Received January 2012
Revised April 2012
Accepted April 2012
Downloaded by University of Ghana At 16:46 27 June 2016 (PT)
The Journal of Risk Finance
Vol. 13 No. 4, 2012
pp. 362-380
q Emerald Group Publishing Limited
1526-5943
DOI 10.1108/15265941211254471
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1526-5943.htm
Analyzing the technical efficiency
of insurance companies in GCC
Khalid Al-Amri and Said Gattoufi
Department of Operations Management and Business Statistics,
Sultan Qaboos University, Muscat, Oman, and
Saeed Al-Muharrami
Department of Economics and Finance, Sultan Qaboos University,
Muscat, Oman
Abstract
Purpose The purpose of this paper is to analyze the performances of the insurance sector in Gulf
Cooperation Council (GCC) countries and carry out a comparative analysis for its different units.
Design/methodology/approach The authors analyse the technical efficiency of insurances in the
GCC countries using DEA methodology and Malmquist Productivity Index (MPI) to decompose the
change in the efficiency into an intrinsic component reflecting the individual change in technical
efficiency and a second component reflecting the impact of the change in the market technology on the
individual technical efficiencies of insurance companies.
Findings The study considers 39 insurance firms in the region, with a panel data covering the
period 2005-2007. The authors found that the insurance industry in the GCC is moderately efficient and
there is large room for improvement.
Originality/value In these very special market conditions, a deep analysis of the overall efficiency
of the sector is needed and an assessment of its performance to the authors best knowledge so far
non-existent becomes a must to provide insights about the realities and the future trends of the
sector. This research uses DEA and MPI to assess the efficiency of the insurance sector in the GCC
region and analyses its variation over the period 2005 to 2007.
Keywords Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, GCC countries,
Insurance companies, Organizational performance, Technical efficiency, Data envelopment analysis,
Malmquist index
Paper type Research paper
1. Introduction
The Gulf Cooperation Council (GCC) is an alliance consisting of the six Arab Gulf
countries, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab
Emirates (UAE). These countries are tied up by their common political, economic and
social structures. The creation of the GCC as a regional entity on May 25, 1981 was
aimed to achieve coordination, integration and interconnection between its members.
This necessarily implies the harmonization and the gradual unification of different
regulations and structures.
Though financial services are usually the main driver of any economic growth,
the situation in the GCC was biased toward banking services. The traditional nature of
the economic activity in the region favored the development of the financial
intermediation activities leaving underdeveloped the other financial service activities.
JEL classification G22, D24, L11, L25
 Hence, the insurance sector remained underdeveloped despite the continuous effort of Insurance
the government regulators to boost it. This was worsened by the continuous debate companies
about the compliance of such an activity with the religious rules, particularly the life
insurance products. This led to the creation of non-conventional insurance activity, like in GCC
in banking, that are in conformity with the religious principles about sharing the risk
rather than selling/buying the risk.
In these very special market reality and conditions, a deep analysis of the overall 363
efficiency of the sector is needed and the assessment of its performance, to our best
knowledge inexistent, becomes a must to provide insights about the realities and the
future trends of the sector. This study uses data envelopment analysis (DEA) and
Malmquist productivity index (MPI) to assess efficiency of the insurance sector in the
GCC region and analyses its variation over the period from 2005 to 2007.
The paper is organized into six sections. Section 2 presents the insurance sector in
GCC countries. Section 3 presents the literature review and Section 4 presents the
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methodology and data description. DEA and PMI results are described in Section 5,
and Section 6 concludes the paper.

2. The insurance sector in GCC countries

There are various elements that affect the growth of insurance sector in GCC countries.
The insurance demands have been boosted by the rapid growth rate of GDP and a high
immigration flow of labor. Moreover, the development of the mortgage market that
saw spectacular boom in the region in addition to the new regulations, that made
mandatory for immigrants as well as locals to have health insurance and vehicle
insurance, boosted the market and generated a new dynamism in the sector.
As consequence, the region saw the inception of a new market conditions characterized
by an increasing competition particularly driven by the gradual liberalization of the
sector and its openness to international giants insurer as well as regional firms.
It is worthy to emphasize that the insurance market remained conventional
characterized by a low level of product diversification, particularly for life insurance
segment. However, the recent creation of insurance firms complying with the Shariah
(Islamic religious rules that prohibit any interest based financial activity), namely
Takaful and Family Takaful which literally meaning solidarity, offering non-life
insurances initiated by Islamic banks, created a new dynamism in the sector by
generating new products largely inspired from the conventional products. These new
products are often advised as alternatives to the conventional products offered
elsewhere and even in the region by international Insurer. There is even a recent
interest by international firms in offering similar products, imitating international
banks that are engaged in Islamic banking.
Since 2000, the Islamic insurance sector has been growing more than 15 percent per
annum, yet the market is still at its tip, especially in the Middle East and Southeast
Asia. The demand for Islamic insurance products has grown over the past few years,
particularly within the GCC, as there is a shift toward ethical, innovative and
Shariah-compliant financial solutions. This demand has also resulted in the launching
of new Islamic insurance products and these services not provided only by Islamic
counties, but by American, European and Asian companies.
According to the documents discussed during the Insurex Conference (2009),
a conference meant to identify the key challenges facing the regional insurance industry,
 JRF it was reported that the GCC accounts for only 0.2 percent of global insurance premiums,
13,4 according to a report by Zurich-based reinsurer Swiss Re quoted in Gulf News. The
report said only 6 percent of business in the Mideast gets underwritten and non-life
premiums account for only 0.5 percent of GDP. The UAE is preparing to open
the insurance sector to foreign firms, and is expected to announce new regulations soon.
Moreover, according to the reports presented at a recent Islamic insurance conference,
364 the GCC Islamic insurance sector is set to grow at a 25 percent annual average rate.
The Islamic insurance (Takaful ) market will grow five fold over the next ten years and
the Shariah-compliant insurance is expected to be $14 billion worth by 2015.
Despite the crisis, there was a consensus among the speakers at the Insurex
Conference that the growth in the insurance industry across GCC countries will
continue in 2009 but growth rates are likely to slow to single digits this year in most
these markets and insurance business lines. For example, in UAE overall increases in
insurance premiums could be in the range of 5-8 percent in real terms this year as
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inflation is not expected to noticeably influence the picture. Life insurers expect to see
annual growth rates of 16-20 percent through 2012.
However, the insurance industry in GCC countries still has a long way to go.
Whereas life insurance is the dominant activity in global insurance markets and
accounted for approximately 58 percent in the $4 trillion global premiums in 2007, life
insurance still plays no significant role in the GCC. Some business lines, namely motor
insurance and construction insurance, have met with downward pressures in the first
four months of 2009, confirmed managers from several large domestic insurers, while
adding the overall performance of their firms has nonetheless shown growth of
20-30 percent in the first quarter of the year. The motor insurance, which is a mainstay
source of premiums revenue for insurers across the GCC, has seen attrition due to the
shrinking of new car sales. Medical insurance, which has contributed a large share of
growth since 2006, is going to be a continued growth engine as expansion of
mandatory health insurance schemes will continue in the GCC markets.
The insurance industry across the GCC countries has several major weaknesses.
Mainly, the market remains highly fragmented with relatively small firms. Hence, to
overcome this structural weakness and similarly to what happened in banking
industry, large national and regional or even international consolidations in the market
are expected and even strongly recommended by government regulators. Moreover,
continues to rely on the mandatory nature of buying specific insurance products, failing
in generating its proper free demand. The industry has not yet been able to create the
needed insurance awareness to trigger demand for voluntary insurance covers. This
unawareness has its origins in social and cultural factors. The family and tribal ties are
still strong offsetting the need for any form of insurance, unless it is mandatory.

3. Literature review
There a relatively large literature analyzing the efficiency of insurance firms, using a
variety of approaches. Parametric, non-parametric and hybrid are the main classes of
these approaches.
Noulas et al. (2001) studied the legal framework that characterizes the insurance
sector and the performance efficiency of the non-life insurance companies in Greece for
the period of 1991-1996. The authors found that the efficiency outcome indicates that
 the insurance firms are not producing the intended effect and there is big difference Insurance
among insurance firms in terms of the efficiency level. companies
Cummins et al. (2004), alternatively, provides new information on the effects of
organizational structure on efficiency by analyzing Spanish stock and mutual insurers in GCC
over the period 1989-1997. They test the efficient structure hypothesis, which predicts that
the market will sort organizational forms into market segments where they have
comparative advantages, and the expense preference hypothesis, which predicts that 365
mutuals will be less efficient than stocks. Technical, cost, and revenue frontiers are
estimated using DEA. The results indicate that stocks and mutuals are operating on
separate production, cost, and revenue frontiers and thus represent distinct technologies.
In cost and revenue efficiency, stocks of all sizes dominate mutuals in the production of
stock output vectors, and smaller mutuals dominate stocks in the production of mutual
output vectors. Larger mutuals are neither dominated by nor dominant over stocks in the
cost and revenue comparisons. Thus, large mutuals appear to be vulnerable to competition
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from stock insurers in Spain. Overall, the results are consistent with the efficient structure
hypothesis but are generally not consistent with the expense preference hypothesis.
Tone and Sahoo (2005) applied a new variant of DEA model to examine the
performance of Life Insurance Corporation (LIC) of India. The findings show a
significant heterogeneity in the cost efficiency scores over the course of 19 years.
A decline in performance after 1994-1995 can be taken as evidence of increasing
allocative inefficiencies arising from the huge initial fixed cost undertaken by LIC in
modernizing its operations. A significant increase in cost efficiency in 2000-2001 is,
however, cause for optimism that LIC may now be realizing a benefit from such
modernization. This will stand them in good stead in terms of future competition. Results
from a sensitivity analysis are in broad agreement with the main findings of this study.
Hao and Chou (2005) estimated the Translog cost function for 16 Taiwan life
insurance companies over the period of 1977-1999. They applied the distribution free
approach (DFA) and Battese and Coelli (DFP) model to estimate inefficiency. Because
of the market share, diversification of the product strategy, scale efficiency (SE), and
market growth ration, the authors tested the constants or residuals to find out whether
are related to the so-called X-efficiencies.
Weiss and Choi (2008) investigated the impact of regulation on state automobile
insurance markets while controlling for other state insurance market characteristics
that may be related to performance. The results suggest that insurers in competitive
and non-stringently regulated states may benefit from market power by charging
higher unit prices, however insurers in these states are on average more cost X-efficient
and cost X-efficient insurers charge lower prices and earn smaller profits. The
empirical results also suggest that insurers in some rate regulated states are less
revenue and cost-scale efficient than in competitive states.
Cummins and Xie (2008) analyzed the productivity and efficiency effects of mergers
and acquisitions (M&As) in the US property-liability insurance industry during the
period 1994-2003 using DEA and Malmquist productivity indices. They wanted to
determine whether M&As are value-enhancing, value-neutral, or value-reducing. The
analysis examines efficiency and productivity change for acquirers, acquisition
targets, and non-M&A firms. They also examined the firm characteristics associated
with becoming an acquirer or target through probit analysis. The results provide
evidence that M&As in property-liability insurance were value-enhancing.
 JRF Acquiring firms achieved more revenue efficiency gains than non-acquiring firms, and
13,4 target firms experienced greater cost and allocative efficiency growth than non-targets.
Factors other than efficiency enhancement are important factors in property-liability
insurer M&As. Financially, vulnerable insurers are significantly more likely to become
acquisition targets, consistent with corporate control theory, and we also find evidence
that M&As are motivated to achieve diversification. However, there is no evidence that
366 scale economies played an important role in the insurance M&A wave.
Chen et al. (2009) evaluate the efficiency of life insurers operating in China and
compare foreign firms with domestic firms. They find that foreign insurers have not
brought efficiency into the Chinese market, and that the market is still dominated by
domestic giants. However, the gap between foreign insurers and domestic insurers is
narrowing.

4. Methodology and data description

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This study uses the DEA and MPI to assess the efficiency and change in productivity
of GCC insurance companies. The DEA approach is confirmed approach that provides
relative non-stochastic measures of the efficiency for insurance firms considered in the
sample and currently operating in GCC. The literature explaining and discussing the
DEA methodology is abundant and as example of a valuable reference, we refer to
Cooper et al. (2007).
Moreover, as suggested by Charnes et al. (1995), the window analysis and the MPI
approaches are useful tools to track the pattern of changes in efficiency scores over
time and hence, provide performance analysis over a period of time. In this study, the
MPI is preferred and will be adopted.
MPI in fact has the advantage of being into two components, namely a catch-up
index and a frontier-shift index. In practice, and as reported in Cooper et al. (2007), the
MPI is defined as the product of a catch-up and a frontier-shift terms. It evaluates the
productivity change of a decision making unit (DMU), the insurance firm in our case,
between two time periods. The catch-up (or recovery) term relates to the degree to
which a DMU improves or worsens its efficiency, while the frontier-shift (or innovation)
term reflects the change in the efficient frontiers between the two time periods, and
hence measures the change in the technology in the sector formed by the set of DMUs
considered in the sample, the insurance industry in GCC in the case of this study.
The interpretation of the indices obtained from the decomposition of the MPI is:
.
A (frontier-shift) . 1 indicates progress in the frontier technology around the
corresponding DMU from period 1 to 2, while (frontier-shift) 1 and
(frontier-shift) , 1, respectively, indicate the status quo and regress in the
frontier technology.
.
A (catch-up) . 1 indicates progress in relative efficiency from period 1 to 2,
while (catch-up) 1 and (catch-up) , 1, respectively, indicate no change and
regress in efficiency.

The research design calls for the assessment of the relative technical efficiency (TE) of
each firm considered in the sample, and the identification of the main sources of
inefficiency. The TE can be further decomposed into two efficiency indices to
determine the sources of overall technical inefficiency. The first one is the pure
technical efficiency (PTE) index, which determines the insurers efficiency relative to
 a frontier that exhibits constant as well as variable returns to scale. The other index, Insurance
the SE index, measures whether or not the insurance companies operates at constant companies
returns to scale (CRS) (optional scale) or at increasing or decreasing returns to scale
(sub-optimal scale). Decomposing TE scores into PTE and SE designates, respectively, in GCC
what can be apprehended in the short-term and in the long-term.
In practice, the TE scores are obtained by running the original DEA model under
the CRS assumption, known as the CCR model by reference to Charnes et al. (1978). The 367
PTE scores are obtained by running the DEA model under the assumption of variable
return to scale, known as BCC model by reference to Banker et al. (1984). Any
significant difference between the TE and PTE scores indicates the existence of scale
inefficiency, a deviation from operating at the appropriate scale. The SE scores can be
computed by means of the ratio of the overall TE to that of PTE, as explained in
Coelli et al. (1998) and Avkiran (2004).
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4.1 Data description

The sample considered for the study includes 39 insurance companies listed in
Appendix 1. The primary sources of data for this study are the Osiris database and
annual reports of insurance companies, for the period 2005-2007. For the homogeneity
of the sample, a basic assumption for a reliable analysis, this study did not include
intermediary institutions, such as banks and other financial institutions that their main
business is not in insurance. The online Osiris database was used to gather data about
the financial reports of the insurance firms in the region. A total of 39, listed in
Appendix 1, insurance firms were considered in the final sample. Statistical facts about
the variations in the variables considered for the analysis of insurance sector
performance are provided in Appendix 2. Table I provides the number of insurance
firms operating in each country.
Table II provides insights about the size of the insurance companies included in the
sample for the analysis. Kingdom of Saudi Arabia is the biggest market in value followed
by the Kingdom of Bahrain. In terms of number of operating insurance firms, United
Arab Emirates is by far dominating the rest of GCC countries totaling 23 insurance firms.

4.2 Inputs and outputs

A critical issue in the efficiency analysis is the definition of the variables to be
considered as inputs and outputs to conduct the analysis. A variety of sets of
variables are considered in the existing literature to analyze the efficiency of insurance
firms.
Cummins et al. (1998) states that being a financial service firms, insurers produces
intangible outputs that can be, like other financial services, defined and classified based

Country Number of firms

United Arab Emirates 23

Emirate of Kuwait 7
Kingdom of Bahrain 5 Table I.
Sultanate of Oman 5 Number of insurance
Emirate of Qatar 5 firms operating
Kingdom of Saudi Arabia 4 in each country
 JRF
Net Management Net investment Net premium
13,4 claims expenses income earned

2005
Kingdom of Bahrain 75,884 12,721 13,428 101,325
Kingdom of Saudi Arabia 123,112 6,531 35,617 172,422
368 Emirate of Kuwait 38,133 14,421 14,845 47,834
Sultanate of Oman 16,116 12,377 14,009 37,001
Emirate of Qatar 14,324 7,851 13,161 22,977
United Arab Emirates 20,544 9,608 19,704 30,851
Overall average for 2005 32,483 10,445 17,831 47,138
Overall standard deviation 49,138 11,935 17,639 66,623
for 2005
2006
Kingdom of Bahrain 73,397 19,637 22,778 110,059
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Kingdom of Saudi Arabia 138,691 10,745 39,692 221,034

Emirate of Kuwait 33,490 17,285 14,585 55,206
Sultanate of Oman 12,777 7,267 12,223 22,671
Emirate of Qatar 21,100 8,326 13,080 35,633
United Arab Emirates 23,657 12,502 19,325 39,422
Overall average for 2006 34,474 12,685 18,587 55,800
Overall standard deviation 50,434 16,662 19,547 77,562
for 2006
2007
Kingdom of Bahrain 113,061 23,407 29,407 155,045
Kingdom of Saudi Arabia 158,908 8,342 55,727 243,349
Emirate of Kuwait 38,479 19,652 14,014 57,002
Sultanate of Oman 24,178 10,721 12,011 29,541
Emirate of Qatar 34,031 12,128 19,832 53,119
United Arab Emirates 31,892 17,046 21,687 51,479
Overall average for 2007 47,058 15,872 21,421 69,130
Table II. Overall standard deviation
Summary of averages per for 2007
year and per country of Overall 2005-2007 38,005 13,146 19,476 57,849
variables considered for Overall standard deviation
the analysis for 2005-2007

on three theoretical approaches, namely the asset or intermediation approach, the user-cost
approach, and the value added approach (Berger et al., 1992). An extensive discussion and
their theoretical background and their implications if applied to assess the efficiency of
insurance firms are provided in Cummins and Weiss (1998).
Considering the nature of the insurance industry, the value added approach appears
to be the most appropriate to adopt as mean to assess and analyze the efficiency of
insurance firms in GCC countries. In conformity with the value added approach, two
inputs are considered for the analysis namely: two the inputs are direct cost (X1),
represented in the Osiris database by the net claims and indirect cost (X2)
represented by management expenses. The outputs considered are net premium
earned (Y1), and net investment income (Y2). Because negative values in the inputs
data, the output oriented option was adopted.
 5. The results Insurance
5.1 TE and its decomposition
The DEA results are based on the output maximization model, known as output-oriented
companies
approach. In this approach, the maximum output is determined while holding inputs in GCC
constant.
The DEA model was run twice, once under the CRS assumption and then under the
variable returns to scale (VRS) assumption. CRS assumes that there is no significant 369
relationship between the scale of operations and efficiency, thus small insurance firms
can be as efficient as large insurers in converting the specified inputs into the specified
outputs. DEA under VRS assumption is run to check for scale inefficiency. The scale
inefficiency should be understood as disproportional change in output compared with
any change in inputs.
The CRS efficiency score of each insurance firm measures its TE, which indicates
the inefficiencies due to the input/output configuration and the size of operations. On
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the other hand, VRS efficiency score represents PTE that is the measure of efficiency,
after eliminating the scale inefficiency. Therefore, SE score is calculated by dividing
the TE score by the PTE score (SE TE/PTE).
Using the preceding DEA methodology and data for the 39 insurance firms, TE,
PTE and SE annual scores are calculated for the period from 2005 to 2007 and reported
in Appendix 3, a summary of which is presented in Table III, a summary that averages
the efficiency scores per year as well as for the whole study period for the full set of
insurance firms included in the sample.
The average TE score of 60.87 percent suggests that the insurance sector in GCC
countries is moderately efficient as overall and hence there is a large room for
improvement. The low number of fully efficient insurance firms, as can be seen in
Appendix 3, confirms the statements that the insurance industry in GCC still has a
long way ahead. Moreover, the insurance firms in the GCC countries present a high
dispersion in terms of efficiency. The efficiency scores shows in fact a large range
and high standard deviations as can be seen in Table III. The PTE, as expected,
is slightly higher but still indicates a moderate level of efficiency for the whole sector.

Efficiency measure Mean (%) SD (%) Minimum (%) Maximum (%) Number of efficient firms

Year: 2005
TE 71.86 15.71 41.67 100 5
PTE 76.06 17.07 41.78 100 7
SE 95.13 8.34 63.48 100 5
Year: 2006
TE 55.37 20.66 27.12 100 4
PTE 76.16 19.37 42.02 100 11
SE 44.08 24.82 11.86 100 4
Year: 2007
TE 70.24 15.75 43.08 100 3 Table III.
PTE 80.75 17.10 47.12 100 11 Summary statistics of
SE 88.02 12.88 46.73 100 3 annual averages
Average (2005-2007) of TE scores and their
TE 60.87 9.52 37.29 100 4 decomposition into pure
PTE 76.13 5.77 43.64 100 9 technical scores and
SE 61.11 29.47 40.69 100 4 SE scores
 JRF It is worth to notice the decline of the average efficiency during 2006 and its vigorous
13,4 improvement during 2007. The vigorous improvement in 2007 is due to the new
regulations and the increasing competition made by the gradual liberalization of
the sector.
The average TE of all 39 insurance companies in GCC for 2005 was 71.86 percent
with a minimum score of 41.67 percent efficiency. However, this average decreased in
370 2006 to only 55.37 percent with a minimum score of 27.12 percent raising the standard
deviation to 20.66 percent from 15.71 percent in 2005. The efficiency scores for 2006
show the high standard deviation indication the high dispersion of efficiency score
among the insurance companies. However, in 2007, the average TE back again to
70.24 percent and the minimum efficiency score was 43.08 percent which was the best
minimum score in the three years period. Therefore, the standard deviation was
15.75 percent much less than the previous year.
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5.2 MPI and its decomposition

Considering the insurance firm INS_001, Table IV, an exhibit from Appendix 3, shows
that the catch-up component of the Malmquist index is 1.1614 which indicates that
there was a relative improvement by 16.14 percent from the year 2005 to 2006 while the
frontier component shows a value of 0.9167 which indicates the relative improvement
in the technology had a negative impact of 8.33 percent on the efficiency of this firm.
Hence, some of the internal efficiency improvement was offset by the improvement in
the technology. However, the firm was improving faster than its competitors in terms
of TE. By looking at the MPI, computed as the product of its two components,
the resulting change in TE of the firm INS_001 between year 2005 and 2006 is
6.46 percent. By looking at the changes between 2006 and 2007, Table IV shows that
the deterioration in efficiency due to internal factor is 23.23 percent. The deterioration
was worsened by the negative impact of the improvement in the environment that
registered a 5.70 percent. Hence, the Malmquist index indicates a total deterioration of
27.61 percent deterioration in the TE of the firm INS_001 between the years 2006 and
2007. Hence, this brings the average annual deterioration to 10.56 percent.
For INS_028, we see that though there was a relative deterioration in the internal
efficiency by 1.3 percent, there was a relative deterioration in the technology by
7.62 percent which indicates that the latter deteriorated faster than the former.
Hence, there was a relative improvement in the TE for INS_028 by 6.22 percent between
the years 2005 and 2006.

Catch-up Frontier Malmquist

2005- 2006- 2005- 2006- 2005- 2006-
2006 2007 Average 2006 2007 Average 2006 2007 Average

INS_001 1.1614 0.7677 0.9645 0.9167 0.9430 0.9299 1.0646 0.7239 0.8943
INS_028 0.9870 1.4157 1.2013 1.0762 0.8216 0.9489 1.0622 1.1631 1.1126
Table IV. Average 1.4584 2.1233 1.7908 0.9450 0.8397 0.8923 1.3779 1.4708 1.4243
Exhibit from the full Max. 7.3552 18.5134 9.3595 1.9016 1.2384 1.2932 6.7899 13.5521 6.8432
results of the Min. 0.0731 0.2734 0.5521 0.6530 0.2720 0.6671 0.0625 0.2128 0.4862
decomposition of the MPI SD 1.3782 3.7491 1.8811 0.2202 0.1830 0.1567 1.3287 2.1150 1.1455
 By looking at the averages, one can add to the fact that the insurance sector was Insurance
registering high growth, the fact that this growth was accompanied by a continuous companies
and sustainable improvement in the TE of the sector registering 37.79 percent from
2005 to 2006 followed by 47.08 percent between 2006 and 2007, that is an average in GCC
annual improvement in the overall TE of the insurance sector by 42.43 percent.
However, the high values of standard deviation indicate the high dispersion of the
sample in terms of changes in the TE. 371
The full results of the decomposition are reported in Appendix 3. Individual
analysis about each insurance firm can be conducted. By comparing to the average and
to its competitors, each firm can identify its benchmarks and hence defines its targets
in terms of efficiency and get useful insights about whether the weakness/strength is
internal or due to the impact of changes in the technology prevailing in the sector.

6. Concluding remarks
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This study investigates and analyses the TE of insurance companies in GCC countries
using DEA as well as using MPI to measure the change in the efficiency during the
periods of 2005-2007. Up to date, no DEA and MPI analysis of TE of insurance
companies in the GCC countries has been conducted before.
The result show that the average of TE scores for three years was 60.87 percent
suggesting that the insurance industry in GCC was moderately efficient and there is a
large room for improvement. The low number of fully efficient insurance companies
proves that the insurance industry in GCC still has long way ahead. The efficiency
scores show that there were large and high standard deviation indicating the high
dispersion of efficiency scores.
The result also show that insurance sector was experiencing high growth, and this
growth was accompanied by continuous improvement in the TE for the periods from
2005 to 2007.
Our analysis suggests that the insurance industry in GCC countries have been
boosted by the rapid growth rate of GDP and by the high immigration flow of labor.
Our findings suggest that the insurance industry has yet some way to go in developing
the efficiency to win global insurance competition.

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Theory, Methodology and Applications, Kluwer, Boston, MA.
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foreign and domestic firms, China & World Economy, Vol. 17 No. 6, pp. 43-63.
 JRF Coelli, T.J., Rao, P. and Battese, G.E. (1998), An Introduction to Efficiency and Productivity
Analysis, Kluwer, Boston, MA.
13,4 Cooper, W.W., Seiford, L.M. and Tone, K. (2007), Data Envelopment Analysis, Kluwer, Boston, MA.
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Cummins, J.D. and Xie, X. (2008), Mergers and acquisitions in the US property-liability
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evidence from the Spanish insurance industry, Journal of Banking & Finance, Vol. 28,
pp. 3113-50.
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insurance industry, Working Paper 98-08-B, Wharton School, Philadelphia, PA.
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Insurex (2009), available at: www.eyeofdubai.com/v1/news/newsdetail-30818.htm
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performance of US auto insurers, Journal of Banking & Finance, Vol. 32, pp. 134-56.

Further reading
Bikker, J.A. and Leuvensteijn, M. (2008), Competition and efficiency in the Dutch life insurance
industry, Applied Economics, Vol. 40, pp. 2063-84.
Fenn, P., Vencappa, D., Diacon, S., Klumpes, P. and OBrien, C. (2008), Market structure and the
efficiency of European insurance companies: a stochastic frontier analysis, Journal of
Banking & Finance, Vol. 32, pp. 86-100.
Gardner, L.A. and Grace, M.F. (1993), X-efficiency in the US life insurance industry, Journal of
Banking & Finance, Vol. 17, pp. 497-510.
Yao, S., Han, Z. and Feng, G. (2007), On technical efficiency of Chinas insurance industry after
WTO accession, China Economic Review, Vol. 18, pp. 66-86.

Corresponding author
Khalid Al-Amri can be contacted at: kalamri@squ.edu.om

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 Appendix 1 Insurance
companies
Code Insurance company Country
in GCC
INS_1 Abu Dhabi National Insurance Company UAE
INS_2 Abu Dhabi National Takaful Co UAE
INS_3 Al Ahlia Insurance Company Bahrain 373
INS_4 Al Ain Ahlia Insurance Company UAE
INS_5 Al Buhaira National Insurance Company UAE
INS_6 Al Dhafra Insurance Company UAE
INS_7 Al Fujairah National Insurance Company UAE
INS_8 Al Khaleej Insurance & Reinsurance Company Qatar
INS_9 Al Sagr National Insurance Company UAE
INS_10 Al Wathba National Insurance Co UAE
INS_11 Al-Ahleia Insurance Company Kuwait
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INS_12 Alliance Insurance UAE

INS_13 Arab Insurance Group Bahrain
INS_14 Arab Orient Insurance Company UAE
INS_15 Arabian Scandinavian Insurance Company UAE
INS_16 Bahrain Kuwait Insurance Company Bahrain
INS_17 Bahrain National Holding Company Bahrain
INS_18 Company For Cooperative Insurance KSA
INS_19 Dhofar Insurance Oman
INS_20 Doha Insurance Company Qatar
INS_21 Dubai Insurance Company UAE
INS_22 Dubai National Insurance & Reinsurance UAE
INS_23 Emirates Insurance Company UAE
INS_24 First Takaful Insurance Company Kuwait
INS_25 Gulf Insurance Company Kuwait
INS_26 Islamic Arab Insurance Company UAE
INS_27 Kuwait Insurance Company Kuwait
INS_28 Kuwait Reinsurance Company Kuwait
INS_29 Mediterranean & Gulf Insurance & Reinsurance KSA
Company
INS_30 Muscat National Holdings Company Oman
INS_31 National General Insurance UAE
INS_32 Oman Insurance Company UAE
INS_33 Oman National Investment Corporation Oman
INS_34 Oman United Insurance Company Oman
INS_35 Qatar General Insurance And Reinsurance Qatar
INS_36 Qatar Insurance Company Qatar
INS_37 Qatar Islamic Insurance Company UAE Table AI.
INS_38 Ras-Al-Khaimah National Insurance Company UAE List of insurance firms
INS_39 United Insurance Company Bahrain included in the sample
 JRF Appendix 2
13,4
Net claims Management expenses Net investment income Net premium earned

2005
374 Kingdom of Bahrain
Average 75,884 12,721 13,428 101,325
SD 128,625 17,199 17,281 171,088
Max. 268,627 38,451 38,981 357,728
Min. 3,487 2,384 1,026 6,248
Kingdom of Saudi Arabia
Average 123,112 6,531 35,617 172,422
SD 58,574 24,118 34,221 72,428
Max. 164,531 23,585 59,815 223,636
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Min. 81,694 210,523 11,419 121,207

Emirate of Kuwait
Average 38,133 14,421 14,845 47,834
SD 20,865 13,580 5,881 25,639
Max. 63,276 37,384 21,558 85,657
Min. 17,209 2,059 5,827 22,721
Sultanate of Oman
Average 16,116 12,377 14,009 37,001
SD 4,298 9,319 14,702 27,045
Max. 20,525 25,487 35,604 76,981
Min. 10,395 5,347 3,930 18,096
Emirate of Qatar
Average 14,324 7,851 13,161 22,977
SD 8,641 6,071 9,232 16,989
Max. 26,766 15,334 27,123 50,920
Min. 4,971 2,518 2,198 8,095
United Arab Emirates
Average 20,544 9,608 19,704 30,851
SD 19,779 12,031 20,601 31,728
Max. 73,276 49,631 72,649 125,658
Min. 926 708 2,724 2,288
Overall
Average 32,483 10,445 17,831 47,138
SD 49,138 11,935 17,639 66,623
Max. 268,627 49,631 72,649 357,728
Min. 926 210,523 1,026 2,288
2005-2007
Overall
Table AII. Average 38,005 13,146 19,476 57,849
Statistical facts about the SD 58,229 17,663 20,022 84,028
variables included in the Max. 412,371 88,457 96,696 558,891
model for the year 2005 Min. 22,000 211,301 440 2,006
 Appendix 3 Insurance
companies
in GCC
2006
Kingdom of Bahrain
Average 73,397 19,637 22,778 110,059
SD 127,756 29,709 33,374 184,467 375
Max. 264,917 64,142 72,540 386,526
Min. 3,678 2,649 1,183 8,128
Kingdom of Saudi Arabia
Average 138,691 10,745 39,692 221,034
SD 36,387 24,424 34,197 63,452
Max. 164,421 28,015 63,873 265,901
Min. 112,961 26,525 15,511 176,167
Emirate of Kuwait
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Average 33,490 17,285 14,585 55,206

SD 23,210 17,873 4,240 45,784
Max. 71,656 47,402 17,578 133,210
Min. 15,128 2,220 7,688 20,804
Sultanate of Oman
Average 12,777 7,267 12,223 22,671
SD 10,493 4,409 21,091 10,299
Max. 21,027 12,603 43,817 32,269
Min. 22,000 2,390 497 8,078
Emirate of Qatar
Average 21,100 8,326 13,080 35,633
SD 20,557 8,514 17,027 39,851
Max. 53,697 21,550 41,179 101,918
Min. 2,226 522 440 2,006
United Arab Emirates
Average 23,657 12,502 19,325 39,422
SD 22,858 16,931 18,374 40,508
Max. 80,528 65,915 72,460 148,241
Min. 854 1,004 2,003 2,479
Overall
Average 34,474 12,685 18,587 55,800
SD 50,434 16,662 19,547 77,562
Max. 264,917 65,915 72,540 386,526
Min. 22,000 26,525 440 2,006
2005-2007
Overall
Average 38,005 13,146 19,476 57,849 Table AIII.
SD 58,229 17,663 20,022 84,028 Statistical facts about the
Max. 412,371 88,457 96,696 558,891 variables included in the
Min. 22,000 211,301 440 2,006 model for the year 2006
 JRF Appendix 4
13,4
2007
Kingdom of Bahrain
Average 113,061 23,407 29,407 155,045
376 SD 199,640 36,006 43,015 269,387
Max. 412,371 77,353 93,529 558,891
Min. 5,972 2,975 1,273 9,907
Kingdom of Saudi Arabia
Average 158,908 8,342 55,727 243,349
SD 35,795 27,780 57,939 69,091
Max. 184,218 27,986 96,696 292,204
Min. 133,597 2 11,301 14,758 194,494
Emirate of Kuwait
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Average 38,479 19,652 14,014 57,002

SD 31,865 29,279 5,967 47,398
Max. 91,133 70,182 20,439 138,634
Min. 13,295 2 3,193 5,044 19,049
Sultanate of Oman
Average 24,178 10,721 12,011 29,541
SD 15,082 8,751 7,446 14,328
Max. 38,566 22,829 19,380 41,902
Min. 7,266 2,671 1,654 8,978
Emirate of Qatar
Average 34,031 12,128 19,832 53,119
SD 40,221 12,799 28,362 68,258
Max. 101,089 32,034 68,459 169,504
Min. 2,748 824 495 2,748
United Arab Emirates
Average 31,892 17,046 21,687 51,479
SD 31,485 23,528 15,095 55,629
Max. 115,363 88,457 51,591 201,832
Min. 2,376 2,153 5,204 5,955
Overall
Average 47,058 15,872 21,421 69,130
SD 71,894 22,555 22,822 103,054
Max. 412,371 88,457 96,696 558,891
Min. 2,376 2 11,301 857 2,748
2005-2007
Overall
Table AIV. Average 38,005 13,146 19,476 57,849
Statistical facts about the SD 58,229 17,663 20,022 84,028
variables included in the Max. 412,371 88,457 96,696 558,891
model for the year 2007 Min. 2 2,000 2 11,301 440 2,006
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2005 2006 2007

Firms no. DMU TE PTE SE TE PTE SE TE PTE SE

1 INS_001 0.8083 1.0000 0.8083 0.7141 1.0000 0.7141 0.6494 0.9364 0.6935
2 INS_002 0.8782 0.9751 0.9007 0.2712 0.4372 0.1186 0.4444 0.5466 0.8129
3 INS_003 0.6312 0.6613 0.9545 0.4140 0.4635 0.1919 0.6914 0.7007 0.9868
4 INS_004 1.0000 1.0000 1.0000 0.8545 0.9386 0.8020 0.9291 1.0000 0.9291
5 INS_005 0.6976 0.7118 0.9800 0.6202 0.6799 0.4216 0.6285 0.7302 0.8607
6 INS_006 0.7010 0.7048 0.9947 0.5230 0.6076 0.3177 0.7302 0.7534 0.9692
7 INS_007 0.5524 0.5544 0.9965 0.3762 0.4202 0.1581 0.5761 0.6383 0.9025
8 INS_008 0.5552 0.5645 0.9835 0.3045 1.0000 0.3045 0.4673 1.0000 0.4673
9 INS_009 0.7257 0.7518 0.9653 0.7218 0.8209 0.5925 0.6059 0.6602 0.9178
10 INS_010 0.8551 0.8740 0.9785 0.6622 0.6968 0.4614 0.7973 0.8699 0.9165
11 INS_011 0.5708 0.5790 0.9858 0.3352 0.6127 0.2054 0.6589 0.7104 0.9275
12 INS_012 1.0000 1.0000 1.0000 0.4180 1.0000 0.4180 1.0000 1.0000 1.0000
13 INS_013 0.7528 1.0000 0.7528 0.4869 1.0000 0.4869 0.6801 1.0000 0.6801
14 INS_014 0.6213 0.6613 0.9394 0.4154 0.7958 0.3306 0.6492 1.0000 0.6492
15 INS_015 0.5877 0.5915 0.9936 0.4120 0.4617 0.1902 0.8964 0.9051 0.9903
16 INS_016 0.5296 0.5311 0.9971 0.4946 0.6577 0.3253 0.6271 0.6996 0.8964
17 INS_017 0.7403 0.7431 0.9962 0.5289 0.7138 0.3775 0.6991 0.7288 0.9592
18 INS_018 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9516 1.0000 0.9516
19 INS_019 0.6700 0.6717 0.9975 0.3735 0.6268 0.2341 0.4688 0.4981 0.9412
20 INS_020 0.7330 0.7941 0.9231 0.4380 0.5544 0.2428 0.6603 0.7035 0.9386
21 INS_021 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.7084 0.7217 0.9816
22 INS_022 0.4167 0.4178 0.9974 0.8798 0.9138 0.8040 1.0000 1.0000 1.0000
23 INS_023 0.8022 0.8187 0.9799 0.4929 0.6438 0.3173 0.6344 1.0000 0.6344
24 INS_024 0.5980 0.6107 0.9792 0.4499 0.6008 0.2703 1.0000 1.0000 1.0000
25 INS_025 0.5625 0.7664 0.7339 0.3681 0.9199 0.3386 0.5521 0.7512 0.7349
(continued)
companies
Insurance

TE scores and their

scores and SE scores

decomposition into PTE
Table AV.
377
in GCC
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JRF
13,4

378

Table AV.
2005 2006 2007
Firms no. DMU TE PTE SE TE PTE SE TE PTE SE

26 INS_026 0.6144 0.9678 0.6348 0.3536 1.0000 0.3536 0.6360 0.9385 0.6777
27 INS_027 0.4957 0.4967 0.9981 0.5135 0.7114 0.3653 0.5799 0.6098 0.9510
28 INS_028 0.8776 0.8896 0.9865 0.6448 0.6896 0.4447 0.8141 0.8443 0.9642
29 INS_029 0.7212 0.8282 0.8708 0.5154 0.8865 0.4569 0.7202 0.8378 0.8597
30 INS_030 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.5544 0.5628 0.9852
31 INS_031 0.6413 0.6508 0.9855 0.5463 0.7645 0.4176 0.7087 0.7443 0.9523
32 INS_032 0.7194 0.8014 0.8976 0.3879 1.0000 0.3879 0.7411 1.0000 0.7411
33 INS_033 0.8658 0.8861 0.9771 1.0000 1.0000 1.0000 0.8833 1.0000 0.8833
34 INS_034 0.5301 0.5321 0.9963 0.3234 0.5640 0.1824 0.4308 0.4712 0.9142
35 INS_035 0.5098 0.5213 0.9779 0.4532 0.6706 0.3039 0.6140 0.6474 0.9483
36 INS_036 0.7653 0.7803 0.9807 0.5909 1.0000 0.5909 0.7756 1.0000 0.7756
37 INS_037 0.7762 0.7843 0.9896 0.4913 0.5603 0.2753 0.5743 0.5924 0.9693
38 INS_038 0.7641 0.7773 0.9830 0.6403 0.7075 0.4531 0.9733 0.9914 0.9818
39 INS_039 0.7539 0.7645 0.9861 0.5779 0.5842 0.3376 0.6833 0.6967 0.9808
Average 0.7186 0.7606 0.9513 0.5537 0.7616 0.4408 0.7024 0.8075 0.8802
SD 0.1571 0.1707 0.0834 0.2066 0.1937 0.2482 0.1575 0.1710 0.1288
Number of fully
efficient firms 5 7 5 4 11 4 3 11 3
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Catch-up Frontier Malmquist

2005-2006 2006-2007 Average 2005-2006 2006-2007 Average 2005-2006 2006-2007 Average

INS_001 1.1614 0.7677 0.9645 0.9167 0.9430 0.9299 1.0646 0.7239 0.8943
INS_002 0.5521 1.2035 0.8778 0.9013 0.8412 0.8713 0.4976 1.0123 0.7550
INS_003 1.2296 1.1481 1.1889 0.9253 0.6841 0.8047 1.1377 0.7855 0.9616
INS_004 0.7489 1.2523 1.0006 0.9117 0.8133 0.8625 0.6828 1.0185 0.8507
INS_005 1.2047 1.1500 1.1774 0.8828 0.8661 0.8745 1.0636 0.9961 1.0298
INS_006 1.2902 1.2671 1.2787 0.7867 0.7096 0.7481 1.0150 0.8991 0.9571
INS_007 0.6704 1.8133 1.2419 0.9974 0.8826 0.9400 0.6687 1.6004 1.1346
INS_008 7.3552 1.0000 4.1776 0.8815 0.4896 0.6855 6.4837 0.4896 3.4866
INS_009 1.1851 0.8286 1.0069 0.8609 0.8610 0.8609 1.0203 0.7134 0.8669
INS_010 0.8070 1.2345 1.0208 0.8330 0.7983 0.8157 0.6723 0.9855 0.8289
INS_011 1.3355 1.1688 1.2522 0.7915 0.8718 0.8316 1.0571 1.0190 1.0380
INS_012 1.0427 1.1041 1.0734 1.0405 0.9078 0.9742 1.0850 1.0023 1.0436
INS_013 1.0362 1.0300 1.0331 1.1337 1.2384 1.1861 1.1747 1.2755 1.2251
INS_014 1.4392 1.2751 1.3572 0.7757 0.9000 0.8379 1.1164 1.1476 1.1320
INS_015 1.2581 2.1923 1.7252 0.8636 0.7690 0.8163 1.0866 1.6858 1.3862
INS_016 2.5970 1.3141 1.9555 0.8080 0.7680 0.7880 2.0983 1.0092 1.5537
INS_017 1.5445 1.2886 1.4165 0.8143 0.7490 0.7816 1.2576 0.9651 1.1114
INS_018 1.0000 17.0428 9.0214 1.0623 0.2720 0.6671 1.0623 4.6352 2.8488
INS_019 0.6804 2.3475 1.5139 0.7687 0.7458 0.7572 0.5230 1.7508 1.1369
INS_020 0.5923 1.4760 1.0341 0.9531 0.7927 0.8729 0.5645 1.1699 0.8672
INS_021 1.0000 0.7374 0.8687 1.0000 0.8789 0.9395 1.0000 0.6482 0.8241
INS_022 6.4992 0.8362 3.6677 1.0447 1.1149 1.0798 6.7899 0.9322 3.8611
INS_023 1.1541 1.6391 1.3966 0.8059 0.7888 0.7974 0.9301 1.2930 1.1115
INS_024 1.3476 1.9408 1.6442 0.7749 0.8778 0.8263 1.0442 1.7036 1.3739
INS_025 1.1893 0.8549 1.0221 1.2800 1.0074 1.1437 1.5224 0.8613 1.1918
INS_026 1.1395 0.5715 0.8555 1.1692 1.1813 1.1752 1.3323 0.6750 1.0037
INS_027 1.4856 1.0626 1.2741 0.8910 0.8347 0.8629 1.3237 0.8869 1.1053
INS_028 0.9870 1.4157 1.2013 1.0762 0.8216 0.9489 1.0622 1.1631 1.1126
INS_029 1.1437 0.8419 0.9928 1.4036 1.0799 1.2418 1.6053 0.9092 1.2572
INS_030 0.8308 0.2734 0.5521 1.0334 0.7784 0.9059 0.8585 0.2128 0.5357
INS_031 1.5724 1.0486 1.3105 0.7714 0.7724 0.7719 1.2130 0.8099 1.0114
(continued)
companies

Malmquist productivity
Insurance

catch-up scores and

indices and their

frontier-shift scores
decomposition into
Table AVI.
379
in GCC
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JRF
13,4

380

Table AVI.
Catch-up Frontier Malmquist
2005-2006 2006-2007 Average 2005-2006 2006-2007 Average 2005-2006 2006-2007 Average

INS_032 2.5362 1.0189 1.7775 1.0371 1.2384 1.1378 2.6304 1.2618 1.9461
INS_033 1.5025 0.8491 1.1758 0.7575 0.9051 0.8313 1.1381 0.7685 0.9533
INS_034 0.2055 18.5134 9.3595 0.6530 0.7320 0.6925 0.1342 13.5521 6.8432
INS_035 1.2978 1.2122 1.2550 0.7394 0.7877 0.7635 0.9595 0.9549 0.9572
INS_036 1.6042 1.0448 1.3245 0.9053 0.9958 0.9505 1.4523 1.0404 1.2463
INS_037 0.0731 1.4466 0.7599 0.8542 0.6291 0.7416 0.0625 0.9100 0.4862
INS_038 1.1040 4.4390 2.7715 1.9016 0.6848 1.2932 2.0993 3.0400 2.5697
INS_039 1.4749 1.1568 1.3158 0.8463 0.7369 0.7916 1.2482 0.8524 1.0503
Average 1.4584 2.1233 1.7908 0.9450 0.8397 0.8923 1.3779 1.4708 1.4243
Max. 7.3552 18.5134 9.3595 1.9016 1.2384 1.2932 6.7899 13.5521 6.8432
Min. 0.0731 0.2734 0.5521 0.6530 0.2720 0.6671 0.0625 0.2128 0.4862
SD 1.3782 3.7491 1.8811 0.2202 0.1830 0.1567 1.3287 2.1150 1.1455
 This article has been cited by:

1. Khalid Al-Amri. 2015. Takaful insurance efficiency in the GCC countries. Humanomics 31:3, 344-353.
[Abstract] [Full Text] [PDF]
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