The current study examines the Total Factor Productivity (TFP) of 12 general insurers in India through the Malmquist Total Factor Productivity Index, using the output maximization model. The Malmquist Index measures the productive change and decomposes the TFP into two components, namely efficiency change and technical change. The efficiency change is further decomposed into pure technical efficiency and scale efficiency index. Analysis of TFP reveal that United Insurance is the only company that exhibited a decline in productivity growth. Average Factor Productivity (AFP) scores reveal that both public and private insurers reported a growth in productivity, though private insurers seem to be more productive.

The Indian insurance industry was under state control till the late 1990s. The Malhotra Committee, in its report in 1994, recommended the liberalization of the Indian insurance sector. The insurance sector was finally liberalized in December 1999, with the passing of the Insurance Regulation and Development Act, which brought about changes in the insurance sector. As a result, private insurers, along with their foreign partners, who were waiting since a long time, started their operations, and due to the increased competition, the general insurance sector flourished. Liberalization brought various significant changes in the insurance regulations and operation methodology of the general insurance companies. Consequently, the sector turned more organized. The current study examines the Total Factor Productivity (TFP) of 12 general insurers in India for the financial years 2002-03 to 2005-06, through the Malmquist TFP Index, using the output maximization model.

Recalling that M indicates the degree of productivity change, if M>1, then productivity gains occur, while if M<1, then productivity losses occur. Regarding changes in efficiency, technical efficiency increases or decreases depending on the technical efficiency being greater than or less than one. An interpretation of the technological change index is that technical progress or regress occurs if index is greater or lesser than one. An assessment of the major sources of TFP gains or losses can also be made by comparing the values of efficiency and technical change. If efficiency is greater than the technical change, then productivity gains are largely the result of improvements in efficiency, whereas if efficiency is lesser than the technical change, productivity gains are primarily due to technological progress. In addition, since overall technical efficiency is the product of pure technical efficiency and scale efficiency, and if pure technical efficiency is greater than the scale efficiency, then the major source of efficiency change (both increase or decrease) is an improvement in pure technical efficiency; whereas if pure technical efficiency is less than the scale efficiency, the major source of efficiency is the improvement in scale efficiency. Subtracting 1 from the index provides the change in efficiency.

Malmquist Indices of Productivity Change, Indian General Insurance Sector, Total Factor Productivity, TFP, Average Factor Productivity, AFP, Decision Making Unit, DMU, Multifactor Productivity, MFP.