Shuji Yao, Zhongwei Han and Dan Luo
PREAMBLE The conventional ways to measure performance and efficiency of insurance companies consist of a series of financial ratios, such as the return to equity, return on assets, expenses to premiums, and so on. However, a single financial indicator cannot generate convincing results to identify the best practice among insurance firms unless the frontier based performance measures are used. The use of single measures ignores many interactions, substitutions or trade-offs among various performance measures. Frontier methods summarise firm performance in a single statistic, taking differences among firms into account. Efficiency and performance are analysed in a sophisticated multidimensional framework that has its roots in economic theory (Cummins and Weiss, 1998). There is another reason that financial ratios, such as return on equity, are not appropriate to assess the performance of insurers in China. Both domestic insurance companies and foreign subsidiaries or joint ventures took advantage of flexibility of accounting methods to make the profit irrelevant to its present performance for tax avoidance purposes. For example, an insurance company can deliberately raise its additions to reserves to reduce the profit when the market is favourable. The ratio of additions to reserves to the total premium of PICC in 2007 was 83.9 per cent, compared to 282.6 per cent of China Pacific and 377.4 per cent of Ping An insurance company (CIRC, 2008). In a hard year, the overestimated reserves can be returned to cover the loss so that the company will pay very little income tax over the whole period. Moreover,...
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