Risk-adjusted efficiency of the insurance industry: evidence from China

In order to investigate the interrelationship between risk and efficiency, based on the multistage data envelopment analysis (DEA) model, this paper introduces a modified measure of risk-adjusted efficiency for the insurance industry in China from 1999 to 2006. By comparing the results from the traditional DEA model and multistage DEA model, it is evident that there are significant changes in the firms' efficiency scores and their related ranks. The results show that the efficiency scores of the insurance firms studied tend to be underestimated if the endogenous risk factors due to bad management are not considered. With the continued development of the insurance industry in China, the insurance firms' capacity to manage risk has shown to have a significant positive impact on the improvement of their efficiency. Further, the risk-adjusted efficiency advantage of non-state-owned enterprises over state-owned enterprises is not as significant as it is when using the unadjusted models. However, the efficiency gap between foreign and domestic insurance firms shows an increasing trend during the sample period.