Cost X-efficiency in China's insurance companies: A stochastic frontier approach

The efficiency of insurance companies directly reflects their core competitiveness. This paper uses a stochastic frontier approach to investigate the cost efficiency levels and their evolution of 23 insurance companies in China from 2005 to 2008. The main objective is to assess whether different risk levels and insurance intermediary's development affect cost X-efficiency. A one-stage regression model is applied to identify the significant variables influencing cost X-efficiency. The results show that insurance companies are operating 40 to 50% below the cost X-efficiency frontier on average. The non-life insurance companies are found to be more X-efficient than life insurance companies and the domestic insurance companies are, on average, more X-efficient than the co-partnership or foreign insurance companies. It appears that the risk status and insurance intermediary's development has a notable impact on insurance company's cost X-efficiency.