Performance analysis of Takaful and conventional insurance companies in Saudi Arabia

Abstract

Purpose

The purpose of this paper is to analyze the performance of Takaful and conventional insurance companies in Saudi Arabia during a period of 2010-2015 by using the data envelopment analysis (DEA) technique for the whole population of insurance companies.

Design/methodology/approach

Given its objectives, the present study adopts the most prevalent DEA approach, by using the DEA Solver-Pro (Version 13). The DEA has emerged as a valuable analytical research technique. It measures the relative efficiency of firms in the presence of multiple inputs and outputs, based on a linear programming technique, and attempts to find out the firms that determine an envelopment frontier, are super efficient and with a higher productivity index.

Findings

It stems from the analysis that on a yearly basis, the average efficiency scores of firms have soared up overtime since 2010 till 2014 reflecting that most of the companies did well on the efficiency front. It is notable to mention here that the top slots for super efficiency are taken over by smaller firms, while the bigger firms are laggards here rather than the leaders. This reflects that the larger insurance firms need to augment their efficiency levels through more efficient utilization of inputs. The results of the study reveal that both Takaful and the larger conventional insurance firms in the country need to strengthen their operations more efficiently in order to take advantage of the economies of scale and scope. Market share and profitability are important determinants of efficiency.

Research limitations/implications

The larger insurance firms in the country need to a possible solution to the issue of inefficient market dynamics might lie in consolidation of the market through mergers and acquisitions. However, this needs a direct involvement of regulators in the Kingdom so that the market becomes healthy. Even though the Saudi insurance sector appears to have benefited from the compulsory insurance regulations for the expatriates and their families, however, there is still a need for efficiency and productivity improvement in the industry. The Takaful firms need to adopt such measures that would help them to take advantage of their specialized products toward efficiency vis-à-vis productivity drives. Finally, the insurance firms in Saudi Arabia need to adopt the use of threshold practices in order to compare their relative performance to improve on their efficiency and productivity levels by catching-up with the frontiers of best practices.

Originality/value

Based on the available literature, an exclusive study on the insurance sector of Saudi Arabia is so far non-existent. The study stands as pioneer to provide a starting point on overall performance evaluation of insurance firms in Saudi Arabia in various contexts in addition to the current and future trends of the insurance sector in the Kingdom.

Citation

Akhtar, M.H. (2018), "Performance analysis of Takaful and conventional insurance companies in Saudi Arabia", Benchmarking: An International Journal, Vol. 25 No. 2, pp. 677-695. https://doi.org/10.1108/BIJ-01-2017-0018