Efficiency in the Short-Term Insurance Industry in Zimbabwe: An application of the Stochastic Frontier Approach

Abstract – Efficiency has stood out to be one of the key fundamentals in economics and as such, many corporates have endeavored in injecting capital, including, human capital in a bid to enhance efficiency. Owing to the stake that efficiency has in the field of economic research, several researchers have delved in a myriad of studies ranging from exploring the determinants of efficiency as well as measuring efficiency in the insurance sector. This study empirically examined the efficiency of Zimbabwe’s non-life insurance companies. Cost and profit efficiency scores were analyzed using the Stochastic Frontier Approach (SFA) which is a parametric approach. The choice of the methodology is based on its ability to separate the error term into two components namely the measurement errors and other random factors. The study utilized annual data from 19 non-life insurance companies during the period ranging from 2010-2017. Findings from the study indicated that firms in Zimbabwe’s non-life insurance sectors had average efficiency scores of 98.51 and 83.16 per cent in cost and profit correspondingly.

Keywords: Parametric Approach, Stochastic Frontier Approach, Cost and Profit Efficiency, Translog cost function

[Cite as: Musiiwa, R., Chinorwadza, T., and Dzingai, M. E. (2020). Efficiency in the short-term insurance industry in Zimbabwe: An application of the Stochastic Frontier Approach. Diverse Journal of Multidisciplinary Research, Vol. 2, Issue 6, Pages 26-33.]