The impact of competition, oil price, and financial market on the cost efficiency of the insurance and takaful industry : evidence from GCC

Abstract

The Gulf’s insurance and takaful industry has recorded significant growth since its introduction. However, the overall performance is relatively low. This study aims to examine the impact of three determinants, competition, oil price, and financial market, on the cost efficiency of the GCC insurance and takaful industry from 2009 to 2016. Also aiming to investigate whether there are differences between takaful operators and insurance companies in terms of impact of those three determinants on the cost efficiency in the GCC. This thesis uses non-parametric approach for estimation purposes, particularly Stochastic Frontier Analysis. In terms of functional form, Translog Cost Function is used in the analysis. Furthermore, the researcher uses a “one-step” by adopting Wang (2002) model, which the properties of the model allow exogenous variables to affect inefficiency by both mean and variance. The results show the relationship between competition and the efficiency is positive and supports the Quiet Life hypothesis, where managers in a less competitive market may utilise the market power of their firms and reduce their efforts .Furthermore, there are differences between takaful operators and conventional insurers concerning the impact of competition on cost efficiency. Moreover, the findings show that the relationship between the oil prices and efficiency is moved from positive to negative when the prices increase, whereas the relationship between the financial market and efficiency is negative. No clear evidence of the impact of the oil prices on efficiency arises from the differences between conventional insurance and takaful. However, there are differences regarding the financial market, negatively in conventional insurance and positively in takaful business. Resource curse hypothesis may justify these results, where firms utilize their resources inefficiently when opportunities are abundant e.g. infrastructure projects. The results have implications for regulators. The positive relationship between competition and cost efficiency may encourage the regulators to support a competitive insurance and takaful industry, which pushes the market players to improve their efficiency. Thus, the policy-makers should promote a competitive industry by having a conducive framework to endorse healthy competition among firms. They should be aware of the degree of competition and use the restrictions and requirements for market entry carefully. Furthermore, the oil prices and the financial market have an indirect impact to this industry, which should the market players develop robust strategies to deal with the external variables and use their resources efficiently regardless of the economic situation in the GCC.