Analyzing the Profitability and Efficiency in European Non-Life Insurance Industry

This paper proposes a new three-step approach to build an Optimal Production Plan for insurance companies. Two techniques are used compared to the existing studies: Lagrangian function and Directional Output Distance Function. As a first step, we estimated the production frontier parameters under which the insurance industry works. The second step consists of applying the Lagrangian function to specify the Optimal Production Plan for each insurance company. These optimal levels are used, in a third step, to construct efficiency scores for the profit and these production factors. We applied this approach on a 250 European Non-Life Insurance Companies (ENLIC) sample in 2008-2014. Our findings show that ENLIC should change their production plans to attain a higher level of Profit Efficiency. Otherwise, owners of ENLIC will contemplate re-investing in some other profitable industries, which preserve the minimum required ROE. Managerial implications and policy are also discussed.