Corporate governance mechanisms and efficiency of insurance firms: evidence from an emerging market

Abstract

The paper assessed linkage amongst governance mechanisms and efficiency of insurers in Kenya over 8 year period from 2013 to 2020. The study estimated the efficiency of insurers using DEA approach in light of previous literature during the first stage. During the second stage, the bias-corrected efficiency scores were regressed against corporate governance (CG) proxies and control variables using SW (2007) approach on a sample of 53 insurers. Using this two-stage, bootstrapping SW approach, the study documents that the Kenyan insurers are technically inefficient. Overall, the paper presents evidence showing that CG variables influence technical efficiency of insurers in Kenya. Precisely, board independence, gender diversity and audit quality positively and significantly impact Kenyan insurers’ technical efficiency. Further, the paper finds that size of the board negatively affect Kenyan insurers’ technical efficiency. However, the study established insignificant relationship between CEO duality, intensity of board activities and technical efficiency. The paper makes contribution to the bourgeoning reservoir of empirical works on the insurers’ CG-efficiency nexus from an emerging market perspective. Particularly, the article offers empirical insights on some of the least studied CG proxies such as gender diversity, quality of audit and intensity of board activities. The research outcomes also have practical implications for regulators, academia, insurers, government policy makers, practitioners, shareholders and consumers of insurance products by raising their awareness on the influence of CG proxies on the efficiency of the insurers. This is especially beneficial in countries that are pursuing CG and efficiency policy reforms.

Keywords:

• Efficiency
• corporate governance
• gender diversity
• data envelopment analysis
• insurance
• Kenya

PUBLIC INTEREST STATEMENT

The financial health of an economy is hinged on insurers’ performance. However, globalization has resulted in a more fluid and competitive business environment and insurers therefore, need to conduct their activities efficiently. Owners of insurance entities, thus, safeguard their interests by controlling the actions of the management through corporate governance (CG). This study contributes to the emerging debate on the CG-efficiency nexus which is critical for insurers to evolve strategies needed to respond to the global challenges such as ever-changing regulatory environment, solvency risks and stiff competition. The findings indicated that the Kenyan insurers are technically inefficient, using more inputs to produce outputs. The paper also shows that CG variables influence insurers’ technical efficiency. These outcomes are important for regulators, academia, insurers, policy makers, practitioners, shareholders and consumers of insurance products by raising their awareness on the level of efficiency and how it is influenced by CG proxies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Samuel Nduati Kariuki

Samuel Nduati Kariuki is a Senior Lecturer and Chairman of the Department of Business Studies, University of Embu. He holds a Ph.D. in Business Administration (Finance) from Jomo Kenyatta University of Agriculture and Technology. His research interests focus on corporate governance, financial risk management, investment and portfolio management, earnings management, financial innovations, strategic management accounting and corporate finance and has published research articles in reputable journals in these and other related areas.