Cost efficiency of international insurance firms

This article examines the cost efficiency of insurance firms located in 11 countries over a five-year period, 1988-1992. Two X-inefficiency measures are derived, one from the stochastic cost frontier model and the other from the distribution-free model. The results show that X-inefficiencies not only vary by country but by size and specialization. Firms in Finland and France have the lowest X-inefficiency, while firms in the United Kingdom have the highest. On average, small firms are more cost efficient than large firms worldwide. Firms grouped into those offering single or specialized services also operate more cost efficiently than those offering a combination of life and nonlife services (combined firms). The results also indicate that the X-inefficiency estimates derived from the stochastic cost frontier model are more suitable for this sample of data than those derived from the distribution-free model.