Efficiency Decomposition in two-stage Data Envelopment Analysis: An application to Life Insurance companies in India

Abstract

This paper evaluates the efficiency of Indian Life Insurance Industry by employing two-stage Relational data envelopment analysis (DEA) methodology to derive system and divisional efficiency scores. The main advantage of two-stage relational DEA is that it identifies the inefficient stage of the process, where multiple stages are involved and help the firm/decision-making unit (DMU) to concentrate in that stage to improve efficiency. Also, this paper analyses the leader–follower among the stages in two-stage DEA using a non-cooperative approach combined with the Pareto solution to identify the dominant decision stage. The empirical results from the data on 17 life insurance companies for the year 2013–2014 clearly show that the companies that are dominant in investment stage are maintaining relatively higher overall efficiency than the companies that are dominant in the premium stage. This key inference has far-reaching managerial implications for the insurance companies towards improving the overall efficiency.