Economies of Scale in the Malaysian Insurance Industry
The insurance industry in Malaysia contributes only a small percentage to the Gross National Product (GNP). Hence in the past not much attention was paid to this industry. The recession years of the mid eighties have, however, forced the authorities to look at the industry rather closely. In fac...
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Format: | Thesis |
Language: | English English |
Published: |
1993
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Subjects: | |
Online Access: | http://psasir.upm.edu.my/id/eprint/8045/1/FEP_1993_5_A.pdf |
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Summary: | The insurance industry in Malaysia contributes only a small
percentage to the Gross National Product (GNP). Hence in the past not
much attention was paid to this industry. The recession years of the mid eighties
have, however, forced the authorities to look at the industry
rather closely. In fact, the government has made further intervention into
the industry by placing it under the supervision of Bank Negara Malaysia
(BNM). Since the takeover, the BNM has been active in revising the
present insurance Act and has been issuing a number of guidelines to
assist insurance companies to operate in an efficient manner. From the
statistics reported in, the Annual Report of the Director General of
Insurance (DGI), there has been some improvements in both sectors. For
example, the forfeiture and surrender rates for the life sector has
decreased due to improvement in the insurers' services. In the general
sector on the other hand, the commission and management expense rates for the high premium bracket insurers (> RM 45 million) were able to be
reduced even though for the low premium bracket insurers « RM 20
million) it was still high.
The thesis analysed the operation of the insurance industry by
examining their cost of operation. This is done by estimating the
industry's cost function as well as estimating the minimum efficient scale
(MES). The estimation of the cost function made use of the statistical cost
function approach. In the analysis of the life sector, the lapse ratio, new
policies and the dummy variable for ownership (foreign or local) have
been shown to affect the average cost. The life sector also experienced
economies of scale but the number of companies which were able to reach
that MES level was still small compared to insurers which experienced
economies of scale but failed to have the minimum scale of cost.
Estimation results for the general insurance industry showed that the
industry did experience the economies of scale. However, the level of the
minimum efficient scale was not able to be determined. Results showed
that in general foreign companies were doing better than the locals. The
overall results for both sectors implied that the size of the local companies
beside the internal problems faced by the sector e.g. high costs for the
general, was a constraint for achieving the efficient scale of production.
The B NM should continue supervising and regulating the industry so that
the companies in the industry can perform to expectations. |
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