A copula regression model for estimating firm efficiency in the insurance industry

This article considers the estimation of insurers’ cost-efficiency in a longitudinal context. The current practice ignores the tails of the cost distribution, where the most and least efficient insurers belong to. To address this issue, we propose a copula regression model to estimate insurers’ cost frontier. Both time-invariant and time-varying efficiency are adapted to this framework and various temporal patterns are considered. In our method, flexible distributions are allowed for the marginals, and the subject heterogeneity is accommodated through an association matrix. Specifically, when fitting to the insurance data, we perform a GB2 regression on insurers total cost and employ a t-copula to capture their intertemporal dependencies. In doing so, we provide a nonlinear formulation of the stochastic panel frontier and the parameters are easily estimated by likelihood-based method. Based on a translog cost function, the X-efficiency is estimated for US property-casualty insurers. An economic analysis provides evidences of economies of scale and the consistency between the cost-efficiency and other performance measures.