An integrated Data Envelopment Analysis and generalized additive model for assessing managerial ability with application to the insurance industry

Abstract

Managerial ability plays a vital role in the performance of business enterprises; however, such efforts are not directly observable. This study estimates managerial ability within the insurance sector of the economy based on two data sets from two different Asian countries. We estimate insurer-wise efficiency using Data Envelopment Analysis (DEA) and regress the logarithm of the obtained technical efficiency on a set of contextual variables influencing insurer performance. In the next stage, we estimate managerial ability from regression residuals (the difference between the observed and fitted values of insurer efficiency). Furthermore, we use this measure of managerial ability as an independent variable for explaining return on equity based on ordinary least squares and general additive model (GAM) regression and show the relationship is highly significant. We compare and contrast the average technical efficiency and managerial ability in the two Asian countries.