Article

Assessing the Technical Efficiency Global Business Review

21(1) 1–17
of Traditional and Corporate © 2018 IMI
SAGE Publications
Agents in Indian Life Insurance sagepub.in/home.nav
DOI: 10.1177/0972150917749722
Industry: Slack-based Data http://gbr.sagepub.com

Envelopment Analysis Approach

Ankitha Shetty1
Savitha Basri1

Abstract
The distribution channels play an imperative role in the life insurance industry. In India, traditional
and corporate agency are contributing immensely to the profitability of the insurance companies. The
challenges faced by the distributional channels such as high attrition, soaring expense ratio and sales
inefficiency have created the need to probe into the efficiency aspects of the channel players. In the
absence of such studies in India, this article evaluates the technical efficiency of distribution channels in
life insurance industry by analysing the data collected from 12 insurance companies for the period 2012
to 2016. The efficiency scores were obtained by applying data envelopment analysis that considered two
inputs (number of agents and commission expenses) and two outputs (average business premium and
total policies sold). The findings reveal no significant difference in the efficiency scores of bancassurance
and traditional agents. Quiet life hypothesis that market share (ratio of premium contribution to
total premium) of distributional channels and their efficiency scores are negatively correlated is not
supported. Moreover, the slack analysis shows excess inputs per output generated for both the channels.
If the companies that scored low in efficiency do not plug the leakages regarding commission as well a
number of agents, adverse performance in the long-term and consequent financial crisis are inevitable.

Keywords
Bancassurance, traditional agents, insurance companies, cost efficiency, data envelopment analysis

Introduction
Life insurance business in India has endured cathartic changes over the last 17 years after insurance
sector was opened to private and foreign companies (Sinha, 2007, 2015). The recent increase in foreign

1
School of Management, Manipal Academy of Higher Education, Manipal, Karnataka.

Corresponding author:
Savitha Basri, School of Management, Manipal Academy of Higher Education, Manipal- 576104, Karnataka.
E-mail: savitha.bs@manipal.edu
2 Global Business Review 21(1)

direct investment limit from 26 per cent to 49 per cent would propel the growth at a compound annual
growth rate of 12 per cent–15 per cent over the next five years (Indian Brand Equity Foundation [IBEF],
2015). The new economic policy of 1999 has put an end to the monopoly of Life Insurance Corporation
of India (LIC) by allowing the entry of private companies who plunged into the life insurance market by
adopting a newer perspective on insurance distribution (Sinha, 2007). At present, the leading distribution
channels in India are the traditional individual agency channel, corporate agency (banks cross-selling
insurance products known as bancassurance), broking channel and direct selling. From an industry
standpoint, it is an agency-dominated business with 90 per cent of the total premium being sourced from
the agency channel. In 2013–2014, there were 992,584 individual agents in public sector (LIC) and
195,916 in private sector. Corporate agents were 540 in public and 149 in private sector (IRDAI, 2016).
Individual agents have procured 95.99 per cent of new business premium for LIC and 40.09 per cent for
private companies (IRDAI, 2016). For LIC, the agency model contributes 98 per cent of insurance busi-
ness because of the dominant role of an individual agent who provides excellent services to customers
that significantly influences the purchase decisions. Unlike LIC, private sector companies rely on indi-
vidual agents for 47 per cent of the premium and bancassurance channel for 33 per cent of the business.
The growth rate of premium over a period of 2012–2013 to 2013–2014, for individual agents, has shown
a negative growth of –2.57 per cent, whereas corporate agents perform better with an impressive growth
of 18.06 per cent. The industry’s total expense ratio has also decreased, and the commission as a percent-
age of total expenditure has fallen from 48 per cent in FY15 to 36 per cent in FY16.
For selling the insurance products, the distribution channel members consider commission and other
benefits offered by insurance companies; on the other hand, their performance is measured through sales
effectiveness and efficiency, equity and profitability (Chang, Peng, & Fan, 2011; Dutta, 2013; Dutta &
Sengupta, 2011; Sinha & Chatterjee, 2011). Since the life insurance industry is facing severe headwinds
grappling with rising costs and deteriorating distribution structure and stalled reforms, achieving sales
efficiency is highly desirable for profitability and viability of the companies (Benoist, 2002; Rao, 2008).
The rest of the article is organized as follows: The second section reviews the relevant literature on the
efficiency of distributional channels of insurance companies followed by the ‘Objectives of the Study’
section. The ‘Methodolody’ section discusses ‘Data Source and Sample Frame’ and ‘Rationale for
Choosing DEA Approach’. The fifth section presents data and the description of the selected variables
and analyses the results. The ‘Discussion’ section discusses the findings followed by the ‘Conclusion’ of
the study. The last two sections highlight managerial implications and limitations of the study.

Review of Literature
The conceptual approaches to understand market concentration, market share and efficiency are based
on structure–conduct–performance, efficient structure hypothesis and quiet life hypothesis. Market-
performance paradigm has been entangled with efficiency as a key factor of competitiveness. For the
present study, we empirically test quiet life hypothesis developed by Hicks (1935) that states a negative
relationship between market power and efficiency. When the banks have larger market share, the manag-
ers become complacent and ignore the need to curtail cost that in turn increases inefficiency (Hicks,
1935; Rhoades, & Rutz, 1982). Several studies made efforts to know bank efficiency and market power
of banks by using quiet life hypothesis. Some studies confirmed the hypothesis (Coccorese & Pellecchia,
2010; Hao & Chou, 2005), while other researchers did not find support for the hypothesis (Maudos & de
Guevara, 2007). While empirically testing the hypothesis, these studies used market power measured by
Herfindhal–Hirschman index that considers the sum of squared market shares of each bank. Since the
present article explores the relationship between efficiency and market share of the distributional channel
Shetty and Basri 3

where Herfindhal–Hirschman index cannot be calculated, we use the ratio of premium contributed by the
distribution channel to total premium as a proxy for channel power.
Efficiency is a characteristic of organizational outputs (effectiveness, equity, quality) and inputs
(economy, cost), and the relationship between these outputs and inputs. It can be analysed with the data
envelopment approach (DEA) to observe the units that are unproductive and inefficient (Yang, 2006).
De Pree Jr, Jude and Turner (1995) used DEA approach to evaluate legal services costs in measuring the
efficiency of insurance companies. Meimand, Cavana and Laking (2002) in New Zealand monitored the
relative performance of the branches of The New Zealand Accident Insurance Company by taking reha-
bilitation, commission and complaints as inputs and number of claims and commission paid as outputs.
Alhassan, Addisson and Asamoah (2015) point to an increasing level of competition in both life
and non-life insurance industry in Ghana, though life insurance seems to be more efficient compared
to the non-life insurance sector. The findings of Hu, Zhang, Hu and Zhu (2009) in China suggests that
the insurers’ market power, the distribution channels and the ownership structures may be attributed
to the variation in the efficiencies. Park, Lee and Kang (2009) investigate coexistence of multiple distribu-
tion systems in property-casualty (P/C) insurance industry in the US. The findings show that independent
agent are cost inefficient compared to insurers with other distribution systems, but the independent agent
insurers have better revenue efficiency compared to other distribution channels. Chang et al. (2011)
compared bancassurance and traditional insurer sales channel in Taiwan with business and administra-
tive expenses, number of sales representatives, number of branches and commission as inputs and
premium as output. The findings reveal that the average efficiency scores of traditional sales channels
are significantly higher than those of bancassurance channels. Luhnen (2009) asserts that exclusive agent
insurers are more efficient than brokers. Yao, Han and Yeng (2007) assessed the technical efficiency of
China’s insurance industry using DEA and revealed large-sized firms to be more efficient than smaller
ones. The efficiency of US life insurers mostly focused on scale economies (Gardner & Grace, 1993,
Yuengert, 1993). These studies conclude significant scale economies in the industry, although larger
firms are found to exhibit decreasing returns to scale. Kasman and Turgutlu (2009) examined the cost
efficiency and scale economies of 85 Turkish insurance firms for a period of 15 years using stochastic
frontier model. It is found that smaller firms are more efficient than larger firms. In Malaysian context,
a higher management cost would cause takaful operators to face cost inefficiency. Indeed, the operating
activity in takaful industry, specifically underwriting, is less cost-efficient than insurance industry
(Ismail, Alhabshi, & Bacha, 2011).
Tone, Kaoru and Sahoo (2005) analysed the cost-efficiency model to examine the performance of
LIC. The findings show a significant heterogeneity in the cost-efficiency scores over the two decades,
and the decline in performance can be taken as evidence of increasing allocative inefficiencies arising
from the massive initial fixed cost undertaken by LIC in modernizing its operations. Sinha (2007) com-
pared 13 life insurance companies concerning technical efficiency for the period 2002–2006 using the
assurance region approach. The results indicate declining technical efficiency scores during the period
2004 and 2006. Sinha and Chatterjee (2011) studied the technical efficiency of 11 life insurance compa-
nies using window analysis. The total expenses (operating expenses and commissions paid) related to
insurance business was taken as the proxy for the inputs and operating income and net premium income
as output. The findings reveal a huge difference between the LIC and private life insurance companies
regarding technical efficiency and SBI Life Insurance performed efficiently among the private sector
insurance companies.
A study of sales efficiency of dual distribution channels in Indian life insurance industry is needed
when there is a significant difference in the contribution of these channels to the profitability of insur-
ance companies (Chang et al., 2011; Shukla, Bhatt, & Shrivastava, 2012). It has been reported that
4 Global Business Review 21(1)

bancassurance channel is given priority by private new entrants, whereas public insurer (LIC) favours
individual agents. An evaluation of the efficiencies of these models in effectively using input and gener-
ating desirable outputs would enable insurance companies to earmark the scarce resources on an efficient
channel that creates competitive advantage (Bergendahl, 1995).

Objectives of the Study

The studies focusing on the efficiency of insurance distribution channels are few. This article fills the
research gap by assessing the sales efficiency of traditional and corporate agency channel for the period
2012 to 2016 using the non-parametric approach of DEA. The findings will help managers of insurance
companies to identify weak areas that need improvement for optimum utilization of resources and to take
effective measures to minimize the inputs to attain optimized output (Berger, Cummins, & Weiss, 1997).
Since bancassurance channel provides several value-adding services to customers we hypothesize that
corporate agents would achieve more output namely number of policies sold and new business premium
compared to individual corporate agents. Hence, efficiency scores for corporate agents can be expected
to be higher than individual agents. The study also tests quiet life hypothesis by hypothesizing that
market share (premium contribution to total premium) of distributional channels and their efficiency
scores are negatively correlated.

Methodology

Data Source and Sample Frame

There are 24 life insurance companies in India, out of which a sample of 16 life insurance companies met
the criteria of having a tie-up with both the distribution channels as well as minimum number of corpo-
rate agents (more than 10). These 16 life insurance were listed in a descending order according to market
share (total premium collected), and 12 life insurance companies were chosen using randomly generated
numbers. The selected life insurance companies for the study were Kotak Mahindra, HDFC Standard,
ICICI Prudential Life, PNB MetLife, SBI Life, IDBI Federal, Max Life, Bajaj Allianz, LIC, Future
Generali, Bharathi Axa and Shriram Life. The remaining 12 life insurance companies were excluded
from the study as they had limited tie-ups: TATA AIA (2 tie-ups), Sahara (5 tie-ups), Aegon Religare (7
tie-ups), Canara HSBC (4 tie-ups), Star Union (7 tie-ups), IndiaFirst (9 tie-ups), DHFL (8 tie-ups) and
Aviva (5 tie-ups). Edelweiss Tokyo started its corporate agency in 2014. Hence, it was excluded. Star
Union Dai-Ichi, Reliance, Birla Sun Life had no tie-ups. The financial data was gathered from the annual
report including the financial statements and balance sheet from IRDAI handbook statistics. Importantly,
companies included in our sample should have a positive value for all inputs and output for efficiency
measurement. A flow approach technique is used to select inputs and outputs as advocated by Leverty
and Grace (2010). The inputs are commission and number of agents (Bikker & Leuvensteinijn, 2008;
Chang et al., 2011) and outputs are average new business premium earned and total number of policies
sold (Chang et al., 2011; Greene & Segal, 2004; Kao & Hwang, 2008).

Rationale for Choosing DEA Approach

DEA is a non-parametric approach with a linear programming used to measure the relationship of outputs
to assigned resource inputs and determine the efficiency score as an optimization result. DEA approach
Shetty and Basri 5

seeks to identify peers with a higher quantity of output with a given input or a given quantity of output
for less quantity of input, and it is undoubtedly a popular method to measure efficiency of companies
(Hoque, & Rayan, 2012; Titko, Stankevičienė, & Lāce, 2014).
DEA decomposes the efficiency into technical and allocative efficiency; technical efficiency is either-
maximizing output for a given level of inputs or minimizing inputs for a given level of output. Kao and
Hwang (2008), Greene and Segal (2004), Debasish (2006), Akhtar (2010), Chang et al. (2011) and
Bhatia and Mahendru (2016) have applied DEA for its capability in capturing the relationship between
multiple inputs and outputs.
Furthermore, being a non-parametric approach, it does not require specifying the functional form or
distributional forms for error which seems to be more flexible than econometric approach. The present
study uses non-parametric approach by applying DEA. We choose this approach on the basis of certain
advantages. The main advantage of this approach lies in lesser demand for data, and therefore it is appro-
priate for small sample size. Second, DEA analyses the efficiency of each firm separately, and can easily
identify the efficiency and productivity changes across the firms (Cummins & Xie, 2008). This study
adopted constant returns to scale and input orientation measure in the DEA model where the input prices
are minimized to produce given outputs. DEA efficiency analysis is performed using Excel Solver
proposed by Zhu (2003).

Minθ, λθ subject to
–yi + Yλ ≥ 0
Θxi – Xλ ≥ 0
N1΄λ = 1
λ ≥ 0,

where θ is a scalar and λ is N × 1 vector of constraints. This envelopment form involves fewer constraints
than the multiplier form (K + M < N + 1). The estimated value of θ obtained is the efficiency score for
each of N firms or Decision Making Units (DMU). The estimate will satisfy the restriction θ ≤ 1with a
value of θ = 1, indicating cost-efficient insurers. The linear programming must be solved N times, once
for each DMU or firm to derive a set of N cost efficiency scores. The convexity constraints (N1’λ = 1)
ensures that an inefficient firm is benchmarked against firms of similar size and the projected point of
the firm on the DEA frontier will be a convex combination of the observed firm.
Tone (2001) proposed the slack-based measure model in which the efficiency of decision-making
units with activity indicated by (x0, y 0) is estimated by the following fractional linear programme:

Min Ω = (1 – 1/m∑s–l/xl0)/(1 + 1/n∑s + k/yk0) (1) s.t. x0 = X m + s– y0 = Y m – s+ m ≥ 0, s– ≥ 0, s+ ≥ 0

X 0 = (X 01, X 02, …, X 0r) and Y 0 = (Y 01, Y 02, …, Y 0m)

1
Ω =  m [∑{(xi0 – s–)/xi0}] × 1/n [∑{(yi0 + s + )/yi0}]–1.

The first term on the right-hand side, that is, 1/m[∑{(xi0 − s–)/xi0}] can be interpreted to evaluate the rela-
tive minimization rate of input i, and hence the first term corresponds to the mean reduction rate of
1
inputs, that is, input inefficiency. Correspondingly, the second term in Equation 2, n [R {y i0 + s + ) /y i0}] –1
measures output inefficiency (Sinha, 2015; Tone, 2001).
6 Global Business Review 21(1)

Results

Descriptive Statistics
The descriptive statistic of the input and output data collected from the annual reports of 12 insurance
companies appear in Table 1. The average number of traditional agents is found to be 149,596 (SD
17077), and an average number of tie-ups in bancassurance channels is 42 (SD 15). The average com-
mission of `13570.771 million and `1649.6562 million was paid to traditional agents and corporate
agents, respectively. It is seen that average premium mobilized by corporate agents is `571.63 million
and for traditional agencies, it is 0.109 million. Traditional agents sell an average policy of 5, and average
number of tie-ups with corporate agents are 42.

Efficiency Scores
The technical efficiency of traditional and corporate agents for each year from 2012 to 2016 is assessed
using DEA approach. The efficiency scores and efficiency rankings appear in Tables 2 and 3. The results
show that Shriram Life Insurance Company is technically efficient in traditional agents’ model (effi-
ciency score of 1 throughout the study period), whereas IDBI Federal is efficient in bancassurance model
(efficiency score of 1 throughout the study period). Among the other companies, IDBI Federal shows
better performance in traditional model with an average score of 0.7012, whereas Shriram Life has a
high score of 0.97241 in bancassurance channel. LIC has a meagre score of 0.02437 in traditional agents’
model and 0.059106 in corporate agents’ model. All the other companies are performing inefficiently in
both traditional and corporate agents’ model (Max Life: 0.161749 and 0.103715, Kotak Mahindra:

Table 1. Descriptive Summary Statistics for Corporate Agents and Traditional Agents

Corporate Agents
Standard
  Mean Deviation Median Maximum Minimum
Commission 1,649,656,200 438,747,027.6 1,625,483,667 4,648,061,800 12,573,800
Number of agents 42 15 44 171 3
(Tie-ups)
Average business 571,639,550 176,119,461 544,803,500 2,410,657,600 6,225,800
premium
Average policies 12,611 3,198 12,493 48,572 241
sold
Traditional Agents
Commission 13,570,771,617 1,004,852,375 13,463,030,083 151,443,019,400 163,190,000
Number of agents 149,596 17,707 149,333 1,174,459 5,050
(employed)
Average business 109,617 155,789 107,917 306,600 29,000
premium
Average policies 5 1 5 24 1
sold
Source: Authors calculation.
Shetty and Basri 7

Table 2. Efficiency Scores and Efficiency Rankings of Traditional Agents’ Model

Average
S.No DMU 2012 2013 2014 2015 2016 Efficiency Rank
 1 Kotak Mahindra 0.24168 0.162661 0.135118 0.10848 0.103904 0.150369 8
 2 HDFC Standard 0.10871 0.122413 0.173899 0.184565 0.303885 0.178694 6
 3 ICICI Prudential 0.040417 0.03533 0.041334 0.068461 0.107763 0.058661 11
Life
 4 PNB MetLife 0.259449 0.248548 0.190101 0.240624 0.400302 0.267805 4
 5 SBI Life 0.09958 0.07974 0.077523 0.075269 0.117682 0.089959 9
 6 IDBI Federal 0.743168 0.562802 0.64328 0.597639 0.959434 0.701265 2
 7 Max Life 0.216467 0.181472 0.135998 0.120245 0.154561 0.161749 7
 8 Bajaj Allianz 0.065093 0.063438 0.09679 0.046907 0.095082 0.073462 10
 9 LIC 0.026953 0.026459 0.028111 0.015332 0.024993 0.02437 12
10 Future Generali 0.294512 0.144632 0.17326 0.280327 0.370045 0.252555 5
11 Bharathi Axa 1 0.630806 0.359327 0.312207 0.394607 0.539389 3
12 Shriram Life 1 1 1 1 1 1 1
Source: Authors’ calculation.

Table 3. Efficiency Scores and Efficiency Rankings of Corporate Agents

Average
S.No DMU 2012 2013 2014 2015 2016 Efficiency Rank
 1 Kotak Mahindra 0.407787 0.283941 0.181262 0.071427 0.077314 0.204346 8
 2 HDFC Standard 1 1 1 0.40318 0.356137 0.751863 4
 3 ICICI Prudential Life 0.370921 0.433837 0.647776 0.454646 0.515481 0.484532 6
 4 PNB MetLife 0.733866 0.505861 0.339513 0.25401 0.211033 0.408857 7
 5 SBI Life 0.082174 0.065638 0.063339 0.053805 0.062372 0.065466 10
 6 IDBI Federal 1 1 1 1 1 1 1
 7 Max Life 0.140071 0.117438 0.117235 0.067527 0.076305 0.103715 9
 8 Bajaj Allianz 0.029936 0.020743 0.012817 0.005565 0.02809 0.01943 12
 9 LIC 0.070299 0.060214 0.062651 0.049204 0.053163 0.059106 11
10 Future Generali 0.491101 0.535167 0.8719 1 0.937925 0.767219 3
11 Bharathi Axa 0.229459 1 0.829123 0.286263 0.331739 0.535317 5
12 Shriram Life 1 1 1 0.862048 1 0.97241 2
Source: Authors’ calculation.

0.150369 and 0.204346, SBI Life: 0.089959 and 0.065466, Bajaj Allianz: 0.073462 and 0.01943, ICICI
Prudential Life: 0.05866 and 0.484532, respectively).
The contribution of individual agents to new business premium has decreased over a period, whereas
corporate agents have excelled in their performance. The new business premium decreased from `23.4
million in 2014 to `20.3 million in 2015, later in 2016 it increased to `21.3 million. In contrast, corporate
agents mobilized `75,108 million in 2014 that increased to `140,181 million in 2015 and `144,747
million in 2016 (IRDAI, 2016) (Table 4). Thus, corporate agents are performing better than individual
agents regarding new business generation. When we consider the number of agents deployed by insur-
ance companies to achieve higher sales, we observe that number of individual agents has successively
fallen to 2,122,757 in 2015 and 2,358,885 in 2014 from 2,581,840 in 2013, depicting a high level of
agent attrition. However, it increased to 2,188,500 in 2016. Similarly, a declining trend is observed in the
8 Global Business Review 21(1)

Table 4. Results of Hypothesis Testing

Channel 2012 2013 2014 2015 2016

Average Efficiency Scores
Corporate agents 0.463 0.502 0.510 0.254 0.387
Traditional agents 0.341 0.271 0.254 0.375 0.336
Mann–Whitney U test
Z score 0.83716 1.0681 1.1547 0.4331 0.2027
U value 57 53 51.5 64 68
Wilcoxon Test
W-score 26.5 29.5 21 29.5 32.5
P-value 0.920 0.757 0.177 0.757 0.969
Source: Authors’ calculation.

number of tie-ups with corporate agents. In 2013, 2,165 corporate agents were roped in to selling insur-
ance; later the number was reduced to 882 in 2014, 739 in 2015 and 689 in 2016 (IRDAI, 2016). As seen
in Figure 1, the average efficiency scores of corporate agency channel show an increasing trend until
2014 (0.510), and it drastically reduces in the year 2015 and recoups by 2016. In contrast, traditional
agency channel shows a decreasing trend of average efficiency score from 2012 to 2014 (0.341 to 0.270)
and an increase in 2015 (0.375), and later it decreased to 0.336.
The study hypothesis was tested using Mann–Whitney U test and the result indicates no significant
difference in the efficiency scores between the traditional agency channel and the corporate agency

Figure 1. Graphical Presentation of Average Efficiency Scores of Corporate and Traditional Agents
Source: Authors’ calculation.
Shetty and Basri 9

Table 5. Peer Analysis of Traditional and Corporate Agents

Traditional Agents Corporate Agents

Peer Peer Peer Peer
DMU Ranking Peers Weights Count Ranking Peers Weights Count
Kotak Mahindra 10 12 0.667 0 7 6 0.134  0
HDFC Standard 6 12 2.000 0 4 6 1.425  0
ICICI Prudential 9 12 1.010 0 3 6 1.89  0
Life
PNB MetLife 3 12 0.718 0 6 6 0.242  0
12 0.204  0
SBI Life 8 12 2.068 0 9 12 0.132  0
6 0.252  0
IDBI Federal 2 12 0.667 0 1 6 1.000 10
Max Life 7 12 1.583 0 8 6 0.483  0
Bajaj Allianz 11 12 0.738 0 11 12 0.007  0
6 0.003  0
LIC 12 12 6.000 0 10 6 0.027  0
12 0.066  0
Future Generali 5 12 0.340 0 2 12 0.028  0
6 0.003  0
Bharathi Axa 4 12 0.667 0 5 12 0.007  0
6 0.002  0
Shriram Life 1 12 1.000 11 1 12 1.000  6
Source: Authors’ calculation.

(p > 0.05). The results of Wilcoxon tests reveal that for individual insurance companies, the efficiency
rank of the traditional sales channels exhibits no relationship with that of the corporate agents, and there
is no efficiency rank relationship between traditional sales and corporate agents. Quiet life hypothesis
was tested by measuring the correlation between channel power (share of earned premium in total premium)
and efficiency score calculated using DEA approach. For traditional agents and corporate agents the cor-
relation was –0.440 (p = 0.152) and –0.212 (p = 0.508), respectively. Moreover, the correlation between
commission and efficiency score is –0.322 (p = 0.308) for corporate agents and –0.312 (p = 0.324) for
individual agents. In contrast, the correlation between premium and commission is positive for both
channels (0.999, p < 0.01 for corporate agents and 0.859, p < 0.01 for individual agents). Mann–Whitney
U test reveals no difference between both the channels in earned premium and commission (p = 0.887
and 0.889, respectively).
Table 5 portrays the ranking of insurance companies by relative efficiency scores calculated for the
year 2016, the weight of each of the peers and peer count. The results indicate that two DMUs (Shriram
Life and IDBI Federal) are benchmarking units for the other nine DMUs. The efficiency scores for both
these DMUs is unity, while inefficient DMUs have scored less than unity. The required improvement in
their performance is reflected in peer weights. In the traditional channel, LIC is ranked the last, having
efficiency score of 0.024993, and it can refer Shriram Life by assigning a weight of 6.00 to become a
benchmark unit. Shriram Life has become peer unit to all other insurance companies considered for this
study. In case of corporate agency channel, Shriram Life and IDBI Federal have become peer groups to
6 and 10 times, respectively. Bajaj Allianz is ranked the last, having efficiency score of 0.02809, and it
10 Global Business Review 21(1)

can refer IDBI Federal and Shriram Life by assigning a weight of 0.07 to IDBI Federal and 0.003 to
Shriram Life to be an efficient unit. Therefore, Bajaj Allianz should follow 7 per cent of IDBI Federal
and 3 per cent of Shriram Life.

Slack-based Approach for Traditional Agents

The slack-based model identifies inefficient DMUs and shows input resource excess and output shortfall
(Tone, 2001). The result of a static slack model for the year 2016 is given in Table 6. The improvable
space of all DMUs inputs in traditional and corporate agent’s models are commission and number of
agents, whereas outputs are new business premium. Few DMUs have to increase an average number of
policies sold to become efficient. LIC has a positive slack of 99.32 per cent for the commission paid to
traditional agents and 97.5 per cent for the number of agents suggesting that the company has to reduce
the commission to `1,043.87 million and `48.4 million, respectively to be on the efficiency frontier.
Likewise, slack percentage for the commission paid to the traditional agents for ICICI Prudential Life is
89.22 per cent, Kotak Mahindra is 89.61 per cent, SBI Life is 88.23 per cent and Max Life is 84.95 per
cent. Similarly, the slack percentage for the number of agents is high for LIC (97 per cent), Kotak
Mahindra (96.58 per cent), ICICI Prudential Life (96.31 per cent), Bajaj Allianz (96.37 per cent), SBI
Life (90.13 per cent) and Future Generali (91.61 per cent).

Slack-based Approach for Corporate Agents

Table 7 shows the slack-based model for corporate agents and indicates overall efficiency of IDBI
Federal Life and Shriram Life with no input and output slacks. It is seen that Bajaj Allianz has to reduce
the commission to agents to 97.19 per cent to achieve desirable outputs. In the same way, slack percent-
age for commission has been observed in several prominent companies that include LIC (94.68 per cent),
SBI Life (93.76 per cent), Max Life (93.76 per cent), Kotak Mahindra (92.27 per cent), HDFC Standard
(80.57 per cent) and PNB MetLife (78.90 per cent). The number of corporate agents currently employed
by LIC is 119 which has to be reduced by 99.16 per cent to attain the desired outputs. Likewise, Kotak
Mahindra (95.65 per cent), SBI Life (97.42 per cent), Max Life (92.37 per cent), Bajaj Allianz (97.30 per
cent), HDFC Standard (64.39 per cent) and PNB MetLife (84.99 per cent) have to reduce the number of
corporate agents to move towards the frontier.

Discussion
This article is the first empirical study in India that focuses on assessing technical efficiency of tradi-
tional and bancassurance model of distribution in insurance industry using slack-based one-period
measure model in DEA. Some interesting findings emerge from our study: (a) there is no significant
difference in the efficiency scores of corporate agency channels and traditional agency channel, (b) there
is no efficiency rank relationship between traditional sales and corporate agency channel, (c) most of
the companies exhibit input excess and output short fall except Shriram Life Insurance Company Ltd.,
(d) there is no relationship between channel power and efficiency scores and (e) Shriram Life and
IDBI Federal is technically efficient in the traditional and corporate channel of insurance distribution.
These companies lie on the efficient frontier and exhibit the best achievable performance that can be
emulated by inefficient firms.
Table 6. Slack-based Approach for Traditional Agents

Expected
Expected Real Input-2 Reduction Real Output-1 Virtual Output-1 Real Output-2 Virtual Output-
Real Input-1 Reduction in Number of Number of Average New Average New Average Average Policies
DMU Commission Commission (%) Agents Agents (%) Business Premium Business Premium Policies Sold Sold
Kotak Mahindra 1,116,279,000 89.61 86,303 96.58 54,000 68,667 2 2
HDFC Standard 1,145,030,000 69.61 82,381 89.26 67,000 206,000 6 6
ICICI Prudential Life 1,630,139,000 89.22 121,016 96.31 104,000 104,000 1 3
PNB MetLife 312,251,000 59.97 7,989 60.23 74,000 74,000 2 2
SBI Life 305,724,7000 88.23 92,619 90.13 213,000 213,000 5 6
IDBI Federal 120,890,000 4.06 9,309 68.33 49,000 68,667 2 2
Max Life 1,829,046,000 84.95 45,276 84.54 163,000 163,000 4 5
Bajaj Allianz 1,350,134,000 90.49 89,975 96.37 76,000 76,000 2 2
LIC 154,065,908,000 99.32 1,061,560 97.50 285,000 618,000 18 18
Future Generali 159,762,000 63.00 17,919 91.61 35,000 35,000 1 1
Bharathi Axa 293,928,000 60.54 20,561 85.66 60,000 68,667 2 2
Shriram Life 173,979,000 0.00 4,422 0.00 103,000 103,000 3 3
Source: Authors’ calculation.
Table 7. Slack-based Approach for Corporate Agents

Expected Expected
Reduction in Real Input-2 Reduction Real Output-1 Virtual Output-1 Real Output-2 Virtual Output-
Real Input-1 Commission in Number in Number of Average New Average New Average Policies Average Policies
DMU Commission Percentage of Agents Agents Business Premium Business Premium Sold Sold
Kotak Mahindra 1,314,188,000 92.27 23 95.65 211,300,000 211,300,000 3,281 4,555
HDFC Standard 5,571,600,000 80.57 12 64.39 2,251,500,000 2,251,500,000 46,496 48,540
ICICI Prudential 4,181,596,000 65.65 11 48.45 2,987,300,000 2,987,300,000 29,104 64,403
Life
PNB MetLife 1,279,340,000 78.90 13 84.99 430,000,000 430,000,000 12,289 12,289
SBI Life 3,963,623,000 93.76 60 97.42 429,200,000 429,200,000 11,203 11,203
IDBI Federal 759,998,000 0.00 3 0.00 1,580,500,000 1,580,500,000 34,074 34,074
Max Life 5,882,852,000 93.76 19 92.37 763,800,000 763,800,000 12,579 16,467
Bajaj Allianz 171,463,000 97.19 37 97.30 5,700,000 5,700,000 222 222
LIC 911,035,000 94.68 119 99.16 58,300,000 58,300,000 2,231 2,231
Future Generali 15,023,000 6.21 2 50.00 11,300,000 11,300,000 657 657
Bharathi Axa 14,036,000 66.83 3 66.67 5,238,000 5,238,000 215 215
Shriram Life 421,626,000 0.00 6 0.00 233,600,000 233,600,000 19,806 19,806
Source: Authors’ calculation.
Shetty and Basri 13

The average efficiency of bancassurance agents employed by the sample companies for the period
2012 to 2016 was moderate (45 per cent), whereas individual agents’ attained lower efficiency (29 per
cent). This implies that the average bancassurance agents have to enhance operational efficiency by
55 per cent and individual agents have to improve by 71 per cent. The traditional agents can provide
same amount of output by saving 71 per cent of inputs, and corporate agents can save 55 per cent inputs
to achieve same amount of outputs. Almost 10 out of 12 insurance companies are operating at less than
optimal level which sends alarming signal towards resource mismanagement.
The empirical results do not reflect cost efficiency of both the channels for most of the companies
(except for Shriram Life and IDBI Federal), although they adopt different business models. Hence, the
dilemma about choosing the most cost-effective sales channel is unresolved favouring none of the tradi-
tional or bancassurance channels. The prevalent notions favouring bancassurance that cross-selling of
financial products and services maximizes economies of scale and economies of scope, enhances value
and that bancassurance models are cost-effective is questionable.
Traditional agents sell the products of one insurance company, whereas banks can sell the products of
multiple insurers. Both the channels show a significant positive correlation (nearly 1) between premium
earned and the commission paid by the insurers (p < 0.05). Such a relationship indicates direct input–
output relationship where economies of scale (of bancassurance) or expert knowledge (of traditional
agents) does not contribute to higher efficiency. Despite having strength of widely spread branches,
banks are lured to garner higher business (generating premium) in commensurate with commissions and
not focus on higher volume at lower cost. The argument favouring bancassurance for its cost effective-
ness thus falters. Our finding that traditional agents are inefficient in minimizing the cost or maximizing
the premium revenue brings to light the changing role of agents. It has been observed that the individual
agents are diversifying their income sources by selling other financial products such as mutual funds in
addition to insurance.
A negative relationship between efficiency scores and premium as well as commission strengthens
the argument that higher market share (relative contribution of premium to total premium) leads cost
complacence resulting in lower cost efficiency. However, this relationship has been found to be insignifi-
cant for both traditional and bancassurance models as well as for pooled data. Thus, Quite Life Hypothesis
is not supported.
The firms that scored higher in efficiency were from the private sector with foreign partnerships. LIC,
the dominant large life insurance company in Indian life insurance market is found to be less efficient
than its small- to medium-private companies. LIC is losing the market share and sales in recent years,
especially after the opening of life insurance business to private players. IRDAI reports (2016) high level
of individual agents’ attrition in LIC where 0.225 million out of 0.27 million recruited agents voluntarily
left the company. LIC has taken measures to curb attrition by increasing the gratuity to `0.3 million.
In the bancassurance channel, despite having tie-ups with several large public sector banks, more than
150 brokers and top corporate agents to distribute its insurance policies, LIC has been unsuccessful to
use these channels effectively. Instead, it relies largely on its agents for business. Our findings contrast
with the findings of Chang et al. (2011) who document large companies to score high in efficiency
compared to small to medium companies. On the contrary, Shriram Life, a small private company has
managed to attain 38 per cent of the total market share and sold 1.5 lakh policies every year. It has
achieved a growth rate of 16 per cent in both the premium and the number of insurance policies sold
(IRDAI, 2016). The company emphasizes on selling traditional money back plans instead of linked
policies to its customers. Even though Shriram Life has ventured into bancassurance channel recently by
tying up with private and co-operative sector banks, the performance of its corporate agents is noteworthy
compared to early adopters. IDBI Federal seems to be the next most efficient company because of
its strategies focused on brand positioning, distribution and digitization. The company invests in
14 Global Business Review 21(1)

technological solutions to improve front-end sales, distribution and customer service, and also to enhance
back-end operational efficiency and expense management. Thus, our study results confirm the findings
of Kasman & Turgutlu (2009) who found a significant relationship between size and efficiency because
small firms were more efficient than large firms.
Another noteworthy finding is that a majority of life insurance companies use excessive inputs to
achieve current output. In fact, IRDAI (2016) reports commission expenses paid to traditional agents to
be comparatively higher than corporate agents and the recent IRDA notification has capped commission
to 48 per cent for individual and corporate agents. Not surprisingly, our study documents a significant
positive relationship between commissions paid and earned premium, supporting the view that insurance
company is paying hefty commission to garner business. In this regard, recent IRDAI guidelines to place
a cap on insurers’ expense ratio is in the right direction, and such an initiative may compel insurance
companies to reduce the commission paid to agents and offer customers more affordable products that
will decrease mis-selling menace in the industry. One alternative to bring down input cost is the exten-
sive use of insurance analytics to launch products that meet customer needs and digital distribution chan-
nels for servicing the policies. Despite the advantage of multiple channels, insurance companies should
minimize channel conflict by revamping the strategies to enhance profitability with minimum cost.

Conclusion
This study has applied the non-parametric approach of DEA to measure the efficiency scores of tradi-
tional individual agents and corporate agents. The results reveal that there is no significant difference in
the traditional and corporate agency channel. The findings do not support quiet life hypothesis, although
the sign of correlation implies a negative relationship between channel share of premium and efficiency
scores. It is seen that the traditional as well as corporate agency channel still rules the roost in life insur-
ance in India. However, it is losing its sheen for controllable factors such as higher commission rates and
an old-fashioned approach that resent the adoption of newer technology. The findings of this study have
important implications for the insurers who are striving to adopt best practices in financial management.
The insurance companies should reduce the number of agents and commission expenses to move towards
efficient frontiers. However, regardless of cost inefficiencies of both the channels, non-banking entities
(Shriram Life) seek comparative advantage in tie-ups with several banks to avoid fixed costs and reap
scale economies. Thus, in the future, inefficiencies of bancassurance may be overlooked by insurers who
are keen to reach the customers scattered over substantial geographical market. However, insurance
companies should improve the efficiency of the performance of both the channels by tweaking incentive
policies that encourage channel partners to acquire new business at a lower cost. Alternatively, the com-
panies can expand the market through alternative distribution channels such as digital insurance that
employs best financial management practices.

Managerial Implications
Our study provides adequate information to inefficient companies on their shortcomings in operational
activities of distributional channels in every aspect of input excess and output shortfall. The companies
that scored low in efficiency should plug the leakages regarding commission as well a number of agents
to thwart adverse performance in the long-run and the consequent financial crisis. Based on this under-
standing, strategies can be formulated and implemented to position the firm on the efficient frontier.
After identifying a significant scope for intense monitoring and better management to save inputs and
Shetty and Basri 15

improve outputs, we suggest the companies to enhance efficiency by improving channel selection pro-
cesses and supportive efforts. The insurance industry will gain at no additional cost, if the inefficient
channels operate efficiently. Being efficient is highly important when the investment in digital insurance
and social media marketing is gaining pace in India, threatening the survival of traditional individual
agents and bancassurance models. If the channels fail to become efficient, the threat of loss of their
business from insurance companies looms large. For the regulatory board, an awareness of the determi-
nants of cost efficiency may assist in tweaking policies related to distribution channels, especially the
commission paid and modus operandi of channel members such that sustainability and efficiency of
insurance companies are guaranteed.

Limitations
DEA is considered to be an extreme point technique, which is prone to measurement error which causes
significant problems. Since a standard formulation of DEA creates a separate linear programme for each
DMU, large problems can be computationally intensive. The second concern is on the non-availability
of data, especially number of branches tied up with insurance companies, total number of corporate
agents serving in every bank, segregation of operating expenses of corporate agents and traditional
agents. A third concern is the small sample size that may lead to measurement error in DEA. By consid-
ering 12 insurance companies, we have fulfilled the rule of thumb that sample size should be three times
the sum of number of outputs and inputs.

Acknowledgements
The author is grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the
quality of the article. The usual disclaimers apply.

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