Analysis of the impact of solvency capital on efficiency : evidence from Takaful firms in GCC Region

Abstract EN

The minimum solvency capital regulatory standards introduced by insurance sector’s supervisory authorities in the GCC region aimed at protecting and reshaping the takaful takaful industry against adverse effects of global financial crisis as well as other unanticipated socio-economic challenges have attracted different reactions and comments from the sector’s stakeholders.

While the intent may be commendable, concerns are raised by some stakeholders that compliance with this regulation may stifle operation efficiency of these companies.

This paper investigates the impact of solvency capital on efficiency of takaful companies in the GCC region.

The mathematical programming non–parametric data envelopment analysis (DEA) with range adjustment measures (RAM) model is employed for the analysis due to its desirable properties compared to other DEA models.

The outcome of DEA analysis is subjected to diagnostic statistical test using Wilcoxon sign ranked statistical test to determine the impact of solvency capital proxy on efficiency score.

Solvency condition is model to reflect adjustment to two distinct circumstances, namely management and regulatory positions.

Result shows that the adjustment behaviors of takaful companies to solvency conditions affect the efficiency at different period and thus reflects both management and regulatory positions.

The negative trajectory of the longitudinal analysis implies that takaful firm with obvious solvency issue is likely to experience decrease in efficiency over the periods under consideration.