Total Factor Productivity Change in the Non-life Insurance Sector, Kenya: 2005-2009.
Mdoe, Jackson Idi
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The Kenya Vision 2030 acknowledges that financial services will play a critical role by providing better intermediation between savings and investments. Among the financial service providers are non-life insurers. Non-life insurers contribute to economic growth through channelling resources from savers to investment projects, inducing consumption in risk averse individuals, reducing uncertainty and volatility of events as well as diversifying risk. To develop the insurance industry the government has intervened by creating IRA. To consolidate non-life insurers the government raised the paid up capital from Kshs. 150 million to Kshs 300 million and restricted individual ownership of an insurance company to less than 25 percent. The extent to which total factor productivity (TFP) for non-life insurers has changed with these reforms is yet to be determined. This notwithstanding, the actual levels ofTFP change in the Kenyan non-life insurance sector is not known. The study sought to fill this gap by estimating and decomposing total factor productivity change for non- life insurance sector. The study used an output oriented Data Envelopment Analysis (DEA) to derive Malmquist total factor productivity change indices. The indices were then decomposed to identify the sources of productivity change. To achieve these objectives the study used data from 32 non-life insurance firms that existed during the study period (2005 to 2009).The results revealed that, there was 2.7 percent progress in TFP for the sector. This progress in TFP was sourced from innovations. The decomposition of efficiency change into scale efficiency change and pure efficiency change revealed that the 7.8 percent decline in efficiency for the entire sector was occasioned by 2.7 percent decline in scale efficiency and 5.3 percent decline in pure efficiency. The study concluded that for non-life insurers to continue improving their TFP they need to sustain the high innovations and improve efficiency by improving their level of resource utilization and product survival.