Journal of Applied Finance & Banking

Cost Efficiency and Convergence in the European Nonlife Insurance Industry

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  • Abstract

     

    The European authorities undertook a number of legislative initiatives in the last twenty five years in an effort to improve the integration of the financial sector in Europe. The Eurozone crisis that started at the end of 2009 brought a number of countries before bankruptcy and forced the European countries to implement various financial programs. This paper is an effort to see how the crisis affected the level of efficiency and the process of insurance integration in the European Union. It uses Stochastic Frontier Analysis to estimate cost efficiency for a sample of 947 nonlife insurance firms operating in 24 European countries for the period 2006-2014. In a second stage a two-step system Generalized Method of Moments (GMM) is used to examine cost efficiency convergence by looking at beta-convergence and sigma-convergence criteria. The results indicate that cost efficiency has declined over the period suggesting that the financial crisis negatively affected efficiency. The average cost efficiency over the whole period is found to be 86.7% with Denmark to be the most efficient nonlife European insurance market and Greece the worst. Evidence of beta convergence is found but not of sigma convergence.

     

    JEL classification numbers: G10, G22, G22.

    Keywords: Cost efficiency, Integration, Beta-convergence, Sigma-convergence, European Union, Nonlife insurance, Stochastic frontier analysis.