Life Insurance Companies: Determinants of Cost Efficiency and Profitability

  • Joseph Kwadwo Tuffour University of Professional Studies, Accra
  • Kenneth Ofori-Boateng GIMPA Business School
  • Williams Ohemeng GIMPA Business School
  • Jane Kabukuor Akuaku GIMPA Business School


One of the most important aspects of measuring a firm’s performance is its efficiency, through which the firm is expected to envisage effective cost reductions, thereby enhancing profitability. However, most studies conducted to explore the determinants of insurance companies’ performance has concentrated on the accounts earnings information and its components which are known to explain a small proportion of a firm’s performance. Also, studies on insurance either lump all the insurance companies together or pay more attention to non-life insurance, making it difficult to evaluate the fast growing life insurance industry in Ghana. Therefore, this study examines the efficiency of life insurance companies in Ghana utilising data from twelve life insurance companies for a period of 2013-2017. The efficiency scores were calculated using Efficiency Measurement System software. The fixed effect panel regression results show that, the significant determinants of both cost and profit functions are: price of labour, commission, gross premium and net investment income. It was also revealed that, on the average, the life insurance companies were about 71.2% cost efficient and 41.7% profit efficient. Further analysis reveals that, both profit and cost efficiency changes have statistically significant positive effect on firms’ Return on Asset. Policy-makers should institute policies that encourage these companies to operate efficiently in order to make effective capital allocation decisions to avoid collapse.


Download data is not yet available.


Abuzayed, B., & Molyneux, P. (2009). Market value, book value and earnings: Is bank efficiency a missing link? Managerial Finance, 35(2), 156–179.
Aftab, M., Sajjad A., Wasim U., & Rauf, A. S. (2011). The impact of bank efficiency on share performance: Evidence from Pakistan. African Journal of Business Management, 5(10), 3975-3980.
Ahmed, N., Ahmed, Z. & Usman, A. (2011). Determinants of performance: A case of life insurance sector of Pakistan, International Research Journal of Finance and Economics, Eurojournals Publishing, Inc.
Aigner, D. J., Lovell, C. A. K., & Schmidt, P. J. (1977). Formulation and estimation of stochastic frontier production function models. Journal of Econometrics, 6, 21–37.
Akhtar, M. H. (2010). X-efficiency analysis of Pakistani commercial banks. International Management Review, 6(1), 12-24.
Alhassan, A. L. & Addison, G. K. (2013, April). Market structure, efficiency and performance: Empirical evidence from the Ghanaian life insurance market. Paper presented at the First University of Ghana Business School Conference and Development in Africa, Accra, Ghana held April 8–9.
Altunbas, Y., Gardener, E. P., Molyneux, P., & Moore, B. (2001). Efficiency in European banking. European Economic Review, 45, 1931-1955.
Ansah-Adu, K., Andoh, C., & Abor, J. (2012). Evaluating the cost efficiency of insurance companies in Ghana. Journal of Risk Finance, 13(1), 61-76.
Avkiran, N. K. (2006). Developing foreign bank efficiency models for DEA grounded in finance theory. Socio-Economic Planning Science, 4, 275-1796.
Baker, M. & Wurgler, J. (2000). The equity share in new issues and aggregate stock returns. Journal of Finance, 55, 2219–2257.
Battese, G. E., Coelli, T. J. (1995). A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical Economics 20, 325–332. doi:10.1007/BF01205442
Bawumia, M., Belnye, F. & Ofori, M. E. (2005). The determination of bank interest spreads in Ghana: An empirical analysis of panel data, Working Paper, Monetary Policy Committee, Bank of Ghana.
Baye, M. R. (2010). Managerial economics and business strategy (7th ed.). Bolton, MA: McGraw Hill International Edition.
Becalli, E., Casu, B., & Girardone, C. (2006). Efficiency and stock performance in European banking. Journal of Business Finance and Accounting, 33, 245–62.
Berger, A. N. & Humphrey, D. B. (1997). Efficiency of financial institutions: international survey and directions for future research, Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System.
Berger, A. N., Hasan, I & Zho, M. (2009). Bank ownership and efficiency in China: What will happen in the world’s largest nation? Journal of Banking and Finance 33(1), 113-130.
Berger, A., Humphrey, D., & Pulley, L. (1996). Do consumers pay for one-stop banking? Evidence from an alternative revenue function. Journal of Banking and Finance, 20, 1601–1621.
Bikker, J., & van Leuvensteijn, M. (2008). Competition and efficiency in the Dutch life insurance industry, Applied Economics 40(16):2063-2084.
Casu, B., & Girardone, C. (2006). Bank competition, concentration and efficiency in the single European Market, Machester School, 74(4), 441-468.
Casu, B., & Molyneux, P. (2003). A comparative study of efficiency in European banking. Applied Economics, 35(17), 1865-1876.
Casu, B., & Molyneux, P. (2003). A comparative study of efficiency in European banking. Applied Economics, 35(17): 1865-1876.
Charumathi, B. (2012). On the determinants of profitability of Indian life insurers – An empirical study, Proceedings of the World Congress on Engineering, Vol I, WCE 2012, July 4 - 6, London, U.K
Chu, S. F., & Lim, G. H. (1998). Share performance and profit efficiency of banks in an oligopolistic market: Evidence from Singapore. Journal of Multinational Financial Management, 8, 155–68.
Cooper W. W., Seiford L.M., & Zhu J. (2011) Data envelopment analysis: History, models, and interpretations. In: Cooper W., Seiford L., Zhu J. (eds) Handbook on Data Envelopment Analysis. International Series in Operations Research and Management Science, 164. Springer, Boston, MA.
Cooper, W. W., Seiford, L. M., Tone, K. (2000). Data envelopment analysis: A comprehensive text with models, applications, references and DEA-Solver Software. Boston: Kluwer Academic Publishers.
Cummins J. D. & Weiss M. A. (2000). Analyzing firm performance in the insurance industry using frontier efficiency and productivity methods. In: Dionne G. (eds) Handbook of Insurance. Huebner International Series on Risk, Insurance, and Economic Security, 22. Springer, Dordrecht.
Cummins, J. D., Turchetti, G. & Weiss, M. A. (1996). Productivity and technical efficiency in the Italian insurance industry, Working Paper 96-10, The Wharton School, University of Pennsylvania.
Danquah, M., Otoo, D. M. & Baah‐Nuakoh, A. (2018). Cost efficiency of insurance firms in Ghana, Managerial and Decision Economics, 39:213–225.
Debasish, S. S. (2006). Efficiency performance in Indian banking. Use of data envelopment analysis. Global Business Review, 7(2), 57-73.
Demsetz, H. (1973). Industry structure, market rivalry and public policy. Journal of Law and Economics, 16 (1), 1-9.
DeYoung, R. E. & Hughes, J. P. & Moon, C. (2001). Efficient risk-taking and regulatory covenant enforcement in a deregulated banking industry. Journal of Economics and Business, 53(2-3), 255-282.
DeYoung, R. E., Hughes, J. P. & Moon, C. (2001). Efficient risk-taking and regulatory covenant enforcement in a deregulated banking industry, Journal of Economics and Business, 53(2-3), 255-282.
DeYoung, R. E., Hughes, J. P., & Moon, C. G. (2001). Efficient risk-taking and regulatory covenant enforcement in a deregulated banking industry, Journal of Economics and Business, 53, 255-282.
Dutta, A., & Sengupta, P. P. (2010). Impact of technological innovation on efficiency: An empirical study of Indian life insurance industry. 2010 International Conference on Education and Management Technology, 491-495.
Dwi-Martani, M., & Khairurizka, R. (2009). The effect of financial ratios, firm size, and cash flow from operating activities in the interim report to the stock return. Chinese Business Review, 6(8), 44-53.
Ehikioya, B. I. (2009). Corporate governance structure and firm performance in developing economies: Evidence from Nigeria. Journal of Corporate Governance, 9(3), 231–243.
Eisenbeis, R. E., Ferrier, G. D. & Kwan, S. H. (1999). The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding company performance. FRB Atlanta Working Paper Series No. 99-23.
Eling, M. & Luhnen, M. (2010). Efficiency in the international insurance industry: A cross-country comparison, Journal of Banking and Finance, 34(7), 1497-1509.
Eltivia, N., Sudarma, M., Saraswati, R. E. (2014). The effect of cost efficiency on stock performance of listed bank in Indonesia. International Journal of Economics Research, 5 (2), 50-56.
Fama, (1981). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(1), 383–417.
Ferrier, G. D., & Lovell, C. A. K. (1990). Measuring cost efficiency in banking: Econometric and linear programming evidence. Journal of Econometrics, 46, 229–245.
Fiorentino, E., Karmann, A., & Koetter, M. (2006). The cost efficiency of German banks: A Comparison of SFA and DEA. Accessed from on 21st April, 2018.
Fosu Oteng-Abayie, E. F & Aye, G. (2017). Technical efficiency and total factor productivity of rural banks in Ghana, Cogent Economics & Finance, 5:1, DOI: 10.1080/23322039.2017.1366088
Fukuyama, H. & Weber, W. L. (2017). Japanese bank productivity, 2007–2012: A dynamic network approach, Pacific Economics Review, 22(4), 649-676.
Gaganis, C., Hasan, I., & Pasiouras, F. (2013). Efficiency and stock returns: Evidence from the insurance industry. Journal of Productivity Analysis, 40, 429-442.
Graham, J., & Harvey, C. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economies, 60(3), 187–243.
Grygorenko, O. (2009). Effects of Price Setting on Bank Performance: The case of Ukraine. Kyiv School of Economics, Ukraine.
Heizer, J., & Render, B. (2009). Operations management (9th ed.). Upper Saddle River, NJ: Prentice Hall.
Hollo, D., & Nagy, M. (2006). Bank Efficiency in the enlarged European Union. BIS Papers, 28(8), 217-235.
Hopp, Wallace J., Seyed M. R. Iravani, & Gigi Y. Yuen (2007). Operations Systems with Discretionary Task Completion. Management Science, 53(1), 61-77.
Horne, J. C. V., & Wachowicz, J. M. (2008). Fundamentals of Financial Management (13th ed.). Boston, MA: Prentice Hall Financial.
Ioannidis, C., Molyneux, P., & Pasiouras, F. (2008). The relationship between bank efficiency and stock returns: evidence from Asia and Latin America. University of Bath School of Management, Working Paper Series, 2008(10). Retrieved from
Johnson, R. & Soenen, L. (2003). Indicator of successful companies. European Management Journal, 21(3), 364-369.
Kirkwood, J., & Nahm, D. (2006). Australian banking efficiency and its relation to stock returns. The Economic Record, 82, 253-267.
Liadaki A., & Gaganis, C. (2010). Efficiency and stock performance of EU banks: Is there a relationship? Omega, 38(5), 254-259.
Liargovas, P. & Skandalis, K. (2008). Factors Affecting Firms’ Financial Performance: The Case of Greece, Working Papers 0012, University of Peloponnese, Department of Economics.
Lozano-Vivas, A., & Pasiouras, F. (2008). The impact of non-traditional activities on the estimation of bank efficiency: International evidence. University of Bath School of Management Working paper, 2008 (01). Retrieved from on 29th April, 2018.
Mamatzakis, E., Staikouras, C., & Koutsomanoli-Filippaki, A. (2008). Bank efficiency in the new European Union member states: Is there convergence? International Review of Financial Analysis, 17, 1156-1172.
Maudos, J., Pastor, J. M., Perez, F., & Quesada, J. (2002). Cost and profit efficiency in European banks. Journal of International Financial Markets, Institutions and Money, 12(1), 33-58.
Meeusen, W., & van den Broeck, J. (1977). Efficiency estimation from Cobb-Douglas production functions with composed error. International Economic Review, 18, 435–444.
Mensi, S., & Zouari, A. (2010). Efficient structure versus market power: Theories and empirical evidence. High School of Business of Tunis (ESCT), Manouba University Higher Business Studies Institute (IHEC), University of The 7th November at Carthage.
Michael Danquah, M., Otoo, D. M. & Baah‐Nuakoh, A. (2018). Cost efficiency of insurance firms in Ghana, Managerial and Decision Economics. 39(1), 213–225.
National Insurance Commission. (2012). Annual Report and Financial Statements.
National Insurance Commission. (2013). Annual Report 2013, Accra.
National Insurance Commission. (2014). Annual Report 2014, Accra.
Okuda, H., Hashimoto, H., & Murakami, M. (2003). The estimation of stochastic cost functions of Malaysian commercial banks and its policy implications to bank restructuring. Centre for Economic Institutions Working Paper Series No. 2003-2
Owusu-Ansah, E., Dontwi, I. K., Seidu, B., Abudulai, G. & Sebil, C. (2010). Technical efficiencies of Ghanaian general insurers. American Journal of Social and Management Sciences, 1(1): 75-87.
Pasiouras, F., Liadaki, A., & Zopounidis, C. (2008). Bank efficiency and share performance: evidence from Greece. Applied Financial Economics, 18, 1121-1130.
PwC (2015). 2015 Ghana Banking Survey “Bank of the Future: What bank customers want to experience by 2020”
Rossi, S., Schwaiger, M., & Winkler, G. (2004). Banking efficiency in Central and Eastern Europe. Financial Stability Report, 8, 113-125.
Samad, A. (2008). Market structure, conduct and performance: Evidence from the Bangladesh banking industry. Journal of Asian Economics, 19, 181-193.
Sarpong, D. J, Winful E. C, Ntiamoah, J. (2017). Bank efficiency and stock returns. Journal of Economics and International Finance, 9(2), 12-18.
Sathye, M. (2005). Market structure and performance in Australian banking. Review of Accounting and Finance, 4(2), 107-122.
Sealey, C., & Lindley, J. (1977). Inputs, outputs, and a theory of production and cost at depository financial institutions. Journal of Finance, 32, 1251-1266.
Silverman, D. (2004). Qualitative research: Theory, method and practice. London: Sage Publications.
Simpson, J., & Richards, N. D. (2009). The interaction between exchange rates and stock prices: An Australian context. International Journal of Economics and Finance, 1(1), 1-23.
Smirlock, M. (2005). Evidence on the relationship between concentration and profitability in banking. Journal of Money, Credit and Banking, 17(1), 69-83.
Sufian, F., & Majid, A. (2006). Banks’ efficiency and stock prices in emerging markets: Evidence from Malaysia. Journal of Asia-Pacific Business, 7(4), 35-53.
Vardar, G. (2013). Efficiency and stock performance of banks in transition countries: Is there a relationship? International Journal of Economics and Financial Issues, 3(2), 2013, 355-369.
Wu, D., Zijiang Y., Vela, S. & Liang, L. (2007). Simultaneous analysis of production and investment performance of Canadian life and health insurance companies using data envelopment analysis. Computers and Operations Research, 34(1), 180-198.
How to Cite
TUFFOUR, Joseph Kwadwo et al. Life Insurance Companies: Determinants of Cost Efficiency and Profitability. Journal of Accounting, Business and Management (JABM), [S.l.], v. 28, n. 2, p. 1-19, nov. 2021. ISSN 2622-2167. Available at: <>. Date accessed: 08 dec. 2021. doi: