Optimal Production Plan and Profit Efficiency in European Non-life Insurance Companies

This paper investigates profit efficiency and optimal production plan in European non-life insurance companies. To achieve our goal we have employed the directional output distance function in addition to the Lagrangian function that allows the specification of an optimal production plan for each non-life insurance system. At the beginning, based on a sample of 175 non-life insurance companies, dispersed in nine European countries over the period 2002-2008, we have estimated the parameter of our stochastic technology frontier. Then, we have used the Lagrangian function and its attached conditions to assess an optimal profit level for each non life insurance system based on the market prices of inputs and outputs. From optimal quantity of inputs, desirable outputs and undesirable outputs determined in our model we have proposed inefficiency indices for profit and production factors. Our results show that owners of European non-life insurance companies are under-paid because these companies have the possibility to attain a bigger level of profit efficiency while changing their production plan. While trying to search the sources of this profit inefficiency we find that European non life insurance companies sustain additional charges in their operating expenses and they have to enhance both equity and debt capitals.