Efficiency in the Canadian insurance industry: A data envelopment analysis approach

The objective of this work is to provide an alternative means to measure the productive efficiency of insurers in the property and casualty, P&C, insurance industry. Currently, there are several indicators used to measure insurer performance. However, there are several limitations associated with these indicators. Data Envelopment Analysis (DEA) is used to measure the relative efficiency of each insurer by comparing it to a similar "best practice" insurer. One of the strengths of DEA is its ability to handle multiple input and output scenarios, as is the case in the insurance industry.;Two models are developed to capture selected business processes of 120 insurers in the P&C industry. Average pure technical and scale inefficiencies in the industry are determined respectively, as 0.87 and 0.90 based on the operational performance of insurers. In terms of the investment performance of insurers, average technical efficiency scores under variable and constant returns to scale assumptions are determined respectively, as 1.93 and 2.22. The results of this research suggest that variable returns to scale exist in the industry. Insurers, grouped according to specific characteristics, are analyzed in an attempt to determine factors that may affect efficiency.