Post-Reform Life Insurance Industry in India: A Study on Scale Efficiency

Abstract

Indian life insurance industry witnesses a rapid growth during the post-reform period. The current statistics on number of policies and branches, sum assured, premium, share capital, insurance penetration, insurance density etc., show noticeable hike, compared to their respective values at the outset of reform. Also, total fund registers a steep rise with a compound annual growth rate of approximately 17.90% in the last seventeen years. In view of this magnanimous growth of scale, represented here by the summation of total fund and income there from, the present article seeks to measure scale efficiency of the Indian public and private life insurance sectors, both sector-wise and in totality, during the post-reform period. This study applies Econometric Frontier Approach (EFA) to estimate Transcendental Logarithmic (Translog) cost function consisting of one output and two input variables, labour and capital for a time period from 2003-04 to 2017-18. Results on scale efficiency scores of private and public life insurance sectors are 0.274378 and 0.808870 respectively. However, though both the sectors exhibit scale economies, a cautious cost effective policy should be adopted in future by public life insurance sector to raise total fund and to invest them. Indian life insurance industry as a whole portrays huge opportunity to scale-up its total fund as current scale efficiency score is as low as 0.140533.