Efficiency, productivity and competitiveness of the Malaysian insurance sector: an analysis of risk-based capital regulation

• Published in: Geneva papers on risk and insurance. Issues and practice 2021-01, Vol.46 (1), p.146-172
• Main Authors: Lim, Qiao-Ming, Lee, Hui-Shan, Har, Wai-Mun
• Format: Article
• Language: English
• Subjects: Capital requirements; Data envelopment analysis; Economics and Finance; Efficiency; Finance; Insurance; Insurance industry; Productivity; Risk Management
• ISSN: 1018-5895; 1468-0440
• DOI: 10.1057/s41288-020-00173-8

Risk-based capital is used to specify minimum capital requirements for insurers, but it can also cause insurers to bear higher risk if the actual risk of an asset is improperly assessed. This study investigates the efficiency, productivity and competitiveness of the Malaysian insurance industry. The usefulness of regulatory policies will be studied, with particular focus on the risk-based capital framework. This study includes all insurance firms operating in Malaysia between 2000 and 2017. Data envelopment analysis, Malmquist productivity index and Panzar–Rosse methodologies are employed. The findings indicate that life insurers are more efficient and competitive than general insurers. There is a deterioration in the efficiency and productivity of conventional insurers following implementation of risk-based capital requirements. The risk-based capital for Takaful framework, however, improves Takaful insurers’ efficiency and productivity. The findings have implications for business strategy development, such as the level of restrictions on insurance operations. General insurers are recommended to employ technology-enhancing pricing and claims systems to increase efficiency.