Cost efficiency and board composition under different takaful insurance business models

- We examine the efficiency-board composition relation in takaful insurers.
- We find that efficiency in takaful insurers is similar to Western insurers.
- The board-efficiency relation interacts with other factors such as board size.
- Efficiency is unaffected by ownership, product-mix, or the Shariah board.
- Economic forces, business model and regulation do affect efficiency.

This study examines the link between cost efficiency and board composition in non-life takaful insurance firms operating in 17 Islamic countries using panel data for 2004-2007. Nonparametric data envelopment analysis (DEA) is used to compute cost efficiency scores and a second-stage logit transformation regression model is then employed to test the influence of corporate characteristics on these efficiencies. We find that average levels of cost efficiency in takaful insurance markets mirror the efficiency in developed non-life insurance markets. The relative influence of board composition, such as the proportion of non-executive directors on the board, on the cost efficiency of takaful insurers depends on its interaction with other firm-specific characteristics such as board size. Hence, the effect of corporate governance systems on the cost efficiency of takaful insurers can be complicated by various firm-specific factors. Our results could have important commercial and policy implications.