Scale Efficiency and Indian Life Insurance Industry During the Post-Reform Period: An Econometric Study

Abstract

The sine qua non of an efficient financial system is competitiveness which follows liberalisation. For the Indian insurance sector, tryst with liberalisation began two decades ago with the enactment of the Insurance Regulatory and Development Act, 1999. In view of the impact of liberalisation policy on the efficiency of the Indian life insurance sector, the present article seeks to measure scale efficiency of the individual companies and the industry as a whole during the post-reform period. In an attempt to do so, we apply Economic Frontier Approach (EFA) to estimate Transcendental Logarithmic (Translog) cost function consisting of one output and two input variables, i.e., labour and capital, for a wider time period from 2003–04 to 2015–16. Obtained results are mixed. Though the life insurance industry as a whole has huge scope of scale expansion, most of the individual firms are experiencing scale diseconomies. The present paper also succeeds in establishing a relationship between scale efficiency score and firm’s asset size. The outcome suggests a positive relationship between them.

Keywords: Life Insurance, Scale Efficiency, EFA, Translog Function

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