Information Technology and Management

https://doi.org/10.1007/s10799-023-00405-y

Performance analysis and managerial ability in the general insurance

market: a study of India and Iran
Rajiv. D. Banker1 · Alireza Amirteimoori2 · Tofigh Allahviranloo2 · Ram Pratap Sinha3

Accepted: 20 January 2023

© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2023

Abstract
Managerial ability and managerial efforts play key role in the performance of business enterprises. However, this indica-
tor is not directly observable. The current paper focuses on estimating managerial ability in the context of the Indian and
Iranian general insurance sectors. The study is based on 140 firm-year observations in India and 140 firm-year observations
in Iran spread over 7 years (2012–13 to 2018–19). For measuring managerial ability, we have used a three-stage procedure
that involves the estimation of insurer-wise efficiency using Data Envelopment analysis (DEA) in the first stage and then
regression of the logarithm of technical efficiency on a set of explanatory variables. In the final stage, we have estimated
managerial ability from regression residuals (the difference between the observed and fitted values of insurer efficiency).
In order to test the validity of the relationship between return on equity and managerial ability we use the general additive
model (GAM). Our results confirmed that there is a positive relationship between return on equity and managerial ability.
Our findings also revealed that the mean technical and output allocative efficiencies and managerial ability of Iranian markets
highly fluctuated with a high variance. In contrast, these indicators did not fluctuate much in India.

Keywords Data envelopment analysis · Efficiency · Managerial ability · Regression analysis

1 Introduction dependent on managerial skills. Barney [12] thus pointed

out that some organisations have comparative advantages
In a modern form of business organisation, security owner- over the other competing firms when they are in a position
ship and day-to-day control are separated from each other to implement value creating strategy which cannot be repli-
due to the complexities involved in the management of cated by the competitors.
organisations. Thus, the owner(s) of an enterprise engages The research literature with a resource-based view
agents with the managerial ability for running the activities of business organisations on strategic management has
of the organisation Alchian and Demsetz [2], Jensen and explored the impact of managerial ability on firm perfor-
Meckling [35]. Managerial ability refers to the conceptual mance in great detail.
and technical ability of managers occupying leadership roles Castanias and Helfat, [18] thus pointed out that manage-
in business organisations. The possession of such ability is rial talents are of paramount importance for organisations
of paramount importance for the concerned organisations as they are irreplaceable. Adner and Helfat [1] and Hel-
as the sustained growth of the organisation is crucially fat and Peteraf [31] termed such abilities as the cognitive
(managerial) capability which are inclusive of both physical
and mental abilities. However, managerial abilities are not
* Alireza Amirteimoori
[email protected] directly observable and consequently such ability cannot be
treated as a separate input in the production function frame-
1
Merves Chair in Accounting and Information Technology, work. Instead, the influence of managerial ability is embod-
Fox School of Business, Temple University, Philadelphia, ied in other directly observed factors of production. Conse-
USA
quently, the measurement of managerial cognitive ability
2
Faculty of Engineering and Natural Sciences, Istinye remained a difficult proposition because it necessitates the
University, Istanbul, Turkey
elimination of the influence of other contextual variables.
3
Government College of Engineering and Leather
Technology, Kolkata, West Bengal 700106, India

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 Information Technology and Management

Apropos of the important role played by managerial abil- real-life firms and industries. Examples of these firms or
ity in shaping firm performance, the present study seeks to industries can be found in banking industry where the abil-
provide a reliable measure of managerial ability for the gen- ity and the efforts of management play important role; in the
eral insurance companies of India and Iran. General insur- manufacturing industry where firms face considerable effort
ance includes all forms of non-life insurance (fire, marine, of management; among others.
motor, health and other areas of non-life insurance like The present study has five sections and proceeds as fol-
travel, contingent business liabilities etc.). Given the com- lows: The next section includes related managerial ability
plexities and uncertainties of the modern form of productive literature. Section 3 provides a brief introduction to the
business, the general insurance sector plays a significant role general insurance markets of the two countries. Section 4
in risk mitigation in a market-driven economy. The study outlines the methodology adopted for estimating managerial
assumes further importance in view of the structural trans- ability. Section 5 includes data, a description of variables
formation of both the Indian and Iranian insurance industry and a discussion of results. Section 6 concludes.
due to the adoption of deregulation of entry for private insur-
ers and the establishment of insurance market regulators (the
Insurance regulatory and Development Authority of India 2 Related literature
(IRDA) in 1999 and Central Insurance of IR of Iran (CII) in
1971). In the last few decades, several reform measures were Neoclassical production theory recognizes labor and capi-
adopted in both the countries including the dismantling of tal as the two key inputs of production for the production
price ceilings and the adoption of modern portfolio valuation process. The marginal productivity theory emphasizes the
and market disclosure norms. Both the Indian and Iranian incremental performance-linked compensation of the pro-
general insurance markets experienced significant growth ductive inputs. However, the neoclassical theory did not
in premium mobilisation during the last few decades. This explore the structure of modern corporations and the con-
has been possible due to the entry of both diversified and sequential implications on firm and individual payoffs any
specialised general insurers in the markets, which in its turn, further. Alchian and Demsetz [2] highlighted the metering
facilitates the reaping of both economies of scale and scope. problem in the context of productive enterprises when infor-
The growth of the general insurance business in these mation acquisition is costly. In modern corporations, own-
two countries (India and Iran) attracted increased attention ership and management of enterprises are segregated from
from researchers and policymakers in the recent past. One each other and two groups of individuals (principal/owner
finds several research studies which have attempted country- of the enterprise and manager) derive mutual benefits by
specific evaluation of general insurer efficiency in respect of entering into a contract whereby the managers are compen-
both countries. However, till date, very few research studies sated on the basis of their ability/performance Wilson [46],
have estimated managerial ability of general insurers. The Ross [42], Grossman and Hart [29]]. However, productive
current study seeks to fill this research gap and provides a activities require a team effort and in presence of the asym-
measure of managerial ability in the context of Indian and metric information problem, the managerial ability is not
Iranian general insurance industry based on the estimation observable Holmström [32, 33], Holmström and Milgrom
framework advanced by Demerijian et al. [22, 23]. [34]. Coelli and Perelman [20] made a comparison between
Ours is the first attempt that focuses on the calcula- parametric and nonparametric distance function. Linder and
tion of the managerial ability of the general insurers in Foss [39] pointed out that even if the owner has complete
the framework of DEA using the procedure of Banker and information about manager characteristics, he (or she) may
Natarajan [7]. With the help of a three-stage procedure, we only have limited knowledge of the actions initiated by the
convert, using the goal programming theory, this determin- manager. Thus, estimation of managerial performance is
istic quadratic program into a linear program. To show the essential for designing compensation packages and incentive
ready applicability of our proposed program, we exhibit an compatible contracts between the principal and the agent.
illustrative empirical application on Indian and Iran general Initial research literature on managerial competence paid
insurance companies, which were in the pursuit of enlarging attention to the nexus between managerial skill and firm
their market share using available resources. We examined performance. Several research studies tried to quantify man-
the relative efficiencies (technical and allocative efficien- agement quality using data envelopment analysis (DEA).
cies) and managerial ability of insurers across India and Iran. Thus, Barr, Seiford and Siems [13] estimated efficiency
This enabled us to provide a KPI to managerial ability of the scores reflecting management quality of 930 commercial
insurers that is essentially a qualitative measure. Though our banks for the period December 1984 to December 1989.
current empirical application is illustrative, our proposed The study showed that the survivor banks (611 in total)
three-stage procedure to calculate managerial ability can exhibited higher efficiency scores than the 319 banks which
potentially be applied to analyze the performance of many failed during the period. Barr and Siems [14] applied one

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Information Technology and Management

year and two year ahead bank failure forecasting models on comprises the estimation of revenue mobilization perfor-
the basis of CAMEL rating-based evaluation of efficiency mance (in relation to the quantity and mix of resources used)
covering six factors (capital adequacy, asset quality, quality using DEA. In the second stage, the efficiency scores (gen-
of management, earnings ability, liquidity and local eco- erated in the first stage) are regressed on several contextual
nomic conditions). In respect of both the prediction models, variables and a measure of managerial ability is derived as
management quality was found to be an important variable the regression residual. They argued that the influence of
influencing bank performance and the removal of the same variables such that market share, age, time, and etc. need to
from the model building process drastically reduced model be eliminated to the identification of the ability factor. How-
efficacy. Murthi et al. [41] made managerial efficiency evalu- ever, the residual part of firm efficiency may still include
ation in terms of marketing and production efficiencies. The some other unspecified contextual variables, validation
marketing efficiency model made efficiency evaluation on tests are essential in the third and final stage for finding out
the basis ROI (return on investment) and market share as the whether the residual measure obtained in the second stage
output indicators. Efficiency in production was measured by correctly indicates managerial ability. The contribution of
considering the return on investment as the output indica- Demerjian et al. [22] has been extended in several direc-
tor while taking purchase and manufacturing expenses as tions including country-specific studies. Thus, Demerjian
the inputs. In the second stage of the study, the efficiency et al. [23] assessed the link between corporate earnings
scores obtained from the first stage are used as control vari- quality and managerial ability and found that managers with
ables (reflecting managerial quality) for exploring the impact superior ability led to improvement in the earnings qual-
of first-mover advantage on the market share enjoyed by ity of the firm as measured by a higher level of earnings,
the firm. Kweh et al. [36], included three components of the persistence of earnings, fewer earnings restatement,
intellectual capital (value added from operations relative to lower shortfalls the provisions for non-performing assets
the book value of net assets, value-added relative to human etc. Demerjian et al. [24] studied if better managerial abil-
capital and structural capital relative to value added) as indi- ity facilitates stability in earnings management. The study
cators of managerial skills for evaluating the efficiency of strongly indicates that managerial ability positively influ-
25 Malaysian software companies in terms of their ability to ences the smoothing of firm earnings and future operational
convert intellectual capital into company values (indicated performance. Banker et al. [10] utilized 17,040 firm-year
by Tobin’s Q and return on equity). observations (encompassing 2005–2015) for evaluating the
The second approach towards, managerial ability managerial ability of the US property–liability insurance
explored the link between CEO-fixed effect and firm-specific sector. The study showed that managerial ability is strongly
performance. Bertrand and Schoer [17] estimated the impact and positively related to managerial fixed effects and return
of managerial effects (both CEO and CFO) on dependent on assets (ROA). Cvetkoska et al. [21] applied the problem
variables representing corporate policy-based manager-firm of managerial ability determination in the insurance sector in
matched panel data. The corporate policy variables in their North Macedonia, Croatia, Serbia and Slovenia.and identi-
study were investment policy, financial policy, organization fied its determinants. They found that some variables such
strategy and performance. Chang, Dasgupta and Hiillary that CEO duality, the board size, board composition, gender
found that heterogeneity in firm valuation and performance diversity and CEO gender have no significant impact on the
is linked to ability differentials across CEOs. Leverty and managerial ability, while, the diversity of nationalities of the
Grace [38] evaluated the allocative efficiencies of property- CEO has direct and significant impact. For more references
liability insurance companies based on a database ranging on managerial ability and efficiency analysis in banking and
from 1989 to 2000. They used a two-stage procedure and in insurance sector, please see [15, 16, 19, 40, 43].
the second stage they estimated the impact of CEO-specific
effect on efficiency. They revealed that managerial ability
and the company failure have inverse relationship. Several
other studies [including Bamber et al. [4], Dyrang et al. [26]) 3 General insurance in Iran and India
and Ge et al. [28]] showed that firm performance is linked to
managerial characteristics. For more details refer to Demer- After starting modern insurance business in India, more than
jian et al. [25]. hundred general insurance companies are serving in India. In
The third approach towards the estimation of managerial 1991, India has adopted policies of liberalization, privatiza-
ability Demerjian et al. [22] has been to estimate manage- tion and globalization with an important role for the private
rial ability as the residual of efficiency-contextual variables sector. In 1999, based on the recommendations of the High-
regression and validate the same by estimating the relation- Powered Committee of the Indian Insurance Sector (estab-
ship with other measures of performance. This approach has lished in 1993), the Insurance Regulatory and Development
three stages of analysis which are as follows. The first stage Authority was established. This market deregulated in 2000,

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Table 1  Some Key economic Indicator Country 2013 2014 2015 2016 2017 2018 2019
indicators Source: World bank
and CIIRI GDP in billion US Dollar India 1857 2039 2104 2295 2652 2701 2.871
Iran 460 432 385 417 445 294 258.2
Population (in Million) India 1281 1296 1310 1325 1339 1353 1380
Iran 76.4 77.4 78.4 79.5 80.6 81.8 83.99
Gross Direct Premium in India 45,000 48,700 50,900 56,800 64,900 71,100 78,400
Billion USD (Life insur- Iran 690 1166 1001 1084 1201 764 984
ance)
Gross Direct Premium in India 9280 11,060 12,030 15,000 19,900 23,400 24,210
Billion USD (General Iran 5290 6091 4294 4379 4673 3117 3873
insurance)

which led to the entry of private insurance companies in increased secularly from 1.43 to 1.6 between 2012–13 and
both life and non-life sectors. 2014–15, and moved up to 2018–19.
In 1910, the first governmental insurance company in Undesirable political issues influenced on the insurance
Iran has been established and 60 years later, the central industry in Iran. The time duration 2004–2013 is indeed the
insurance company of republic of Iran started the busi- most unstable periods in Iran’s economy. The weak perfor-
ness. It has been established in the form of a state-owned mance of industrial and financial companies, the economic
company and the insurance industry in Iran is regulated downturn and the apathy due to the existence of undesirable
and supervised by central insurance of Iran. In 2006, most international relations have been the most important reasons
of the market share in Iran was owned by state-owned for this stagnation. These unfavorable economic conditions
insurance companies (about 74 percent), and by the end of and this recession had an impact on most financial compa-
2008, there were 20 active insurance companies, of which nies, including insurance companies. In 2012, with govern-
only four were state-owned companies. ment change and positive insight to the nuclear deal and
In the middle of 2010, the insurance industry in Iran peace talks, economic prosperity has been occurred in all
moved towards privatization. As of 2014, 32 insurance financial sectors. However, Failure and impasse in peace
companies do business in Iran and 31 companies are negotiations led to an unexpected recession. Many indus-
private. trial sectors, including the insurance industry, suffered. An
A brief review of some key economic indicators is listed unexpected increase in insurance rates leads to stagnation
in Tables 1 and 2 during the period 2012–13 to 2018–19. in this industry.
Insurance penetration refers to the ratio of insurance pre-
mium to the country GDP. Insurance density, on the other
hand, refers to the per capita insurance premium (expressed 4 Problem statement
in US dollar). Worthy to note that the general insurance pen-
etration of India was only 0.54 in 1999 and it is increased to Managing the relative efficiency of general insurance com-
0.94 by 2019 implying an increase of approximately 80%. panies is considered the key to sustaining a competitive
During the similar period, insurance density grew from advantage for decision makers. Increasing market share,
2.4 to 18. During the same period, insurance penetration maximizing income and reducing expenses are main goals

Table 2  Growth in penetration Country 2013 2014 2015 2016 2017 2018 2019
and density in general insurance
Source: IRDA and CIIRI Insurance Penetration India 0.80 0.70 0.70 0.77 0.93 0.97 0.94
Annual Reports
Iran 1.43 1.5 1.6 1.45 1.33 1.49 1.32
United States 4.30 4.30 4.20 4.29 4.28 4.26 8.51
China 1.40 1.50 1.60 1.81 1.89 1.92 2.01
World 2.80 2.70 2.80 2.81 2.80 2.78 3.88
Insurance Density India 11 11 12 13.2 18 19 18
Iran 96 101 104 112 125 133 121
United States 2296 2360 2377 2449 2542 2672 5580
China 91 109 128 147.2 159 185 201
World 285 294 276 285 297 312 311

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of insurance companies and the companies compete with Log(EDEA ) = 𝛽0 + 𝛽1 Z1 + 𝛽2 Z2 + ⋯ + 𝛽r Zr + U

each other to optimize their performance. The current study
is focused on estimating relative efficiency and managerial When the parameters of the foregoing regression model
ability in insurance market in Iran and India. Toward this are calculated, we proceed to compute the residual from the
end, the following three hypotheses would be analyzed: OLS estimate. As Banker et al. [11] proposed, this residual
provides a good estimation for managerial ability.
H1: The managerial ability in Iranian insurance market has At the final stage, after computing managerial ability,
high variance compared to Indian companies. to validate our results, we will use both OLS and GAM
regression for estimating the impact of managerial ability
H2: The managerial ability, technical and allocative efficien- on return on equity. In our analysis, the GAM relates a uni-
cies of Iranian markets were less than the Indian markets. variate response variable, Log ( EDEA), to some explanatory
variables, Zr . Then we may write the GAM regression equa-
H3: The relationship between return on equity and three tion as:
variables: market share, solvency ratio and managerial abil- ( )
ity is significant and positive. Log(EDEA ) = f0 + f Z1 + f (Z2 ) + ... + f (Zr ) + U

where f0 represent the intercept. The functions f(.) may

4.1 Methodology of estimation
be functions with a specified parametric form or may be
specified non-parametrically, or semi-parametrically, sim-
We now develop a three-stage procedure to evaluate the
ply as 'smooth functions', to be estimated by non-parametric
managerial ability of companies. Inspired by Demerjian
means. Here, we assumed f (Zi)s represent the smooth func-
et al. [22] and Banker and Park [9], our procedure applies
tions of the explanatory variables to be estimated.
the BCC model of Banker et al. [5] and Banker [6] in the
first stage to calculate the technical efficiency. Next, ordinary
least squares (OLS) method is used to estimating the impact
5 Variables, data and results
of contextual variables on the previously-obtained efficiency
scores. The residual from the application of ordinary least
We now describe the input, output and contextual variables
squares in the second stage provides a good measure of man-
that we used in our three-step procedure.
agerial ability. At the end of the procedure, General Additive
Model (GAM) regression in addition to the ordinary least
5.1 Input, output and contextually variables
square method are used to validate the outcome.
Suppose that there are n firms with( each one)using m
T In order to evaluate the relative efficiency of the general
inputs to(produce s) outputs. Let xj = x1j , ..., xmj ∈ ℝm
T ≥0 insurers, we require the specification of inputs and outputs.
and yj = y1j , ..., ysj ∈ ℝs≥0 be, respectively, the input and
As Leverty and Grace [37] stated, there are two different
output vectors of unit j . The input efficiency measure of a
approaches to define insurer outputs: value-added approach
specific DMU o is calculated as follows:
and flow approach. The value-added approach uses out-
𝜃o = min 𝜃 (1) puts that are related to the amount of financial services that
∑n ∑n ∑n insurer provides. However, the flow approach identifies three
s.t. 𝜆 x ≤ 𝜃xio ,
j=1 j ij
𝜆 y ≥ yro (∀r),
j=1 j rj
𝜆 = 1,
j=1 j outputs which are focused on the production of financial
𝜆j ≥ 0(∀j), and 𝜃 ∶ free. safety for a firm’s policyholders, employees, and regula-
In the second stage, OLS method is applied to estimat- tors. It should be pointed out that the flow approach regards
ing the impact of explanatory variables on efficiency scores. the single objective of maximizing profit as inadequate for
Banker and Natarajan [8, 9] proved that in a monotone evaluating an insurer’s performance. Eling and Luhnen [27]
increasing and concave production function, the use of two- determined three inputs used in their analysis: labour, busi-
step procedure including efficiency estimation in the first ness services and capital. Leverty and Grace [37] proposed
step by DEA and the regression of calculated efficiency three different approaches for choosing outputs: the financial
scores on the explanatory variables in the second step using intermediation, the user cost and the value-added.
OLS generates consistent estimators of the parameters of Broadly speaking, the value-added approach assumes
the explanatory variables. Suppose EDEA is the efficiency that the insurers provide three major services: risk-pooling
score obtained from DEA method and Z1, Z2 , …, Zr are the and risk bearing, real financial services and intermediation.
explanatory variables. In the second stage, we will apply the As Jarrya and Bouri [30] stated, some studies have used
following regression model: net premiums as valued added while some others have used

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 Information Technology and Management

incurred benefits and the changes in reserves as output equity. A summary of the descriptive statistics of the data
proxies. appeared in Table 4.
The current research intends to analyse the insurer effi-
ciency with specific focus on their ability to generate rev- 5.3 Technical and allocative efficiency
enues. So, we need to determine the main output indica-
tors that contribute to generating revenue. In this sense, we Suppose we have (j, t) insurers on j = 1, …, 40 and t = 1,
selected two outputs: net premium income and income from … , 7 ye a r s a s DMU (t) . T h e f i r st 2 0 D M U s
investments. We have also considered two inputs: Operating
j

expenses (those expenses that are related to insurance busi- ( DMU (t)
j
∶ j = 1, … , 20 ) are related to the Indian insurers
ness and evidenced on each Insurance subsidiary’s annual and DMU (t) ∶ j = 21, … , 40 are related to the Iranian com-
j
statement) and Claims incurred (Claims paid during the
panies. A specific DMU (t) consumes the resources
experience period plus claim reserved at the end of the expe- j

rience period minus claim reserved at the beginning of the Xj(t) = (x1j
(t) (t)
, … , xmj ) to generate the outputs
experience period). In addition to the insurer-specific inputs Yj(t) = (y(t)
1j
, … , y(t)
sj
) . We use the following BCC model cal-
and outputs, we have also considered the following five con-
culate the relative efficiency of a specific DMU (t):
textual variables: Market share, Insurer age, Insurer size (log o

of total asset), Solvency ratio and Time series dummy (1 for Min 𝜃o(t)
each specific year and zero otherwise). A summary of the
s.t.
data is given in Table 3.
7 H
∑ ∑
𝜆jt xij(t) ≤ 𝜃o(t) xio
(t)
, i = 1, … , m
5.2 Description of data t=1 j=h
7 H
The current research includes 40 general insurance compa- ∑ ∑ (2)
𝜆jt y(t) ≥ y(t)
ro , r = 1, … , s
nies in Iran and India (20 insurers in Iran and 20 insurers in t=1 j=h
rj

India) during seven years. Regarding the number of inputs 7 H

and outputs, it is worthy to note that in benchmarking theory
∑ ∑
𝜆jt = 1
and DEA, if the number of DMUs (n) is less than the com- t=1 j=h
bined number of inputs (m) and outputs (s), many DMUs 𝜆jt ≥ 0, j = 1, … , H
will be termed efficient. So, n should exceed m + s. A rule
of thumb in the DEA literature suggests that n ≥ max {m × s, In Model (2), DMU (t) is efficient if and only if 𝜃o(t) = 1.
o
3 × (m + s)}. In our data set, n = 40, and m = s = 2. So, the Combining the incomes generated by two outputs (NPI and
thumb rule is satisfied as 40 ≥ max {4, 12}. IFI) with two inputs (OE and CI) to get an allocative effi-
In the following, we apply our proposed three-stage pro- ciency score is not the same as the two-input two-output BCC
cedure to estimate the output allocative, technical efficien- efficiency. We estimated the output allocative efficiency of
cies and managerial ability of the insurers and the relation- the insurers by using the following output allocative model:
ship between the calculated managerial ability and return on

Table 3  Description of three Description Type of variable

different variables Source:
Authors Operating expenses (OE), claims incurred (CI) Input variables
Net premium income (NPI), income from investments (IFI) Output variables
Market share (MS), Solvency ratio (SR), Insurer size (IS), Insurer age (IA), Time Contextual variables
series dummy (TSD)

Table 4  A summary of the OE CI NPI IFI MS SR IS IA

descriptive statistics of the data
(Pooled data) Mean 1.5946 13 13 0.8142 0.0006 − 0.27 1 5.125
STD 492.1782 1081.5 1135.3765 300 0.0300 1.54 12 7.0953
Min 7791 20,497 21,488 4328 0.601 5.99 59 10.5604
Max 828.0236 2041.101 2244.5838 661.1059 0.0450 1.5703 16.9179 7.1868
Median 915.5999 2896.4681 3225.025 855.2283 0.0521 0.8374 13.8063 0.9630

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Table 5  Summary statistics Year Country Min Median Max Mean STD
of TE (Country by country)
Source: Calculated 2013 Iran 0.0861 0.4646 1.0000 0.5560 0.2888
India 0.5424 0.6968 1.0000 0.7138 0.1230
2014 Iran 0.0802 0.4449 0.9385 0.5012 0.2487
India 0.5753 0.7090 1.0000 0.7201 0.1000
2015 Iran 0.1036 0.7664 1.0000 0.7351 0.2842
India 0.5772 0.7360 1.0000 0.7469 0.1488
2016 Iran 0.1304 0.5890 1.0000 0.6442 0.3047
India 0.5659 0.7974 1.0000 0.7819 0.1457
2017 Iran 0.2665 0.4830 1.0000 0.5806 0.2614
India 0.5893 0.7064 1.0000 0.7387 0.1200
2018 Iran 0.0382 0.3112 1.0000 0.3505 0.2749
India 0.6015 0.7128 1.0000 0.7382 0.1096
2019 Iran 0.0385 0.3056 1.0000 0.3411 0.2622
India 0.5957 0.7456 1.0000 0.7832 0.1392

y(t)
o
Min
y(t)
o
s.t.
7 H
∑ ∑
𝜆jt xij(t) ≤ xio
(t)
, i = 1, … , m
t=1 j=h
7 H (3)
∑ ∑
𝜆jt y(t)
j
≥ y(t)
o
t=1 j=h
7 H
Fig. 1  Mean of TE scores in Iran and India (country by country) ∑ ∑
𝜆jt = 1
t=1 j=h

𝜆jt ≥ 0, j = 1, … , H.

Table 6  Summary statistics Year Country Min Med Max Mean Std No. of
of TE scores: India versus efficient
Iran (Pooled data) Source: insurers
Calculated
2013 Iran 0.0861 0.4386 1.0000 0.5383 0.2821 2
India 0.3088 0.6300 1.0000 0.6187 0.1747 2
2014 Iran 0.0802 0.4162 0.9385 0.4833 0.2429 0
India 0.3545 0.6594 0.8652 0.6382 0.1327 0
2015 Iran 0.1036 0.7653 1.0000 0.7238 0.2882 7
India 0.3756 0.6617 0.9825 0.6586 0.1891 0
2016 Iran 0.1303 0.5331 1.0000 0.6256 0.3069 4
India 0.3440 0.7588 1.0000 0.7074 0.1828 2
2017 Iran 0.2635 0.4531 1.0000 0.5344 0.2476 3
India 0.3918 0.6742 1.0000 0.6613 0.1289 1
2018 Iran 0.0349 0.2835 1.0000 0.2958 0.2268 1
India 0.4290 0.6747 1.0000 0.6964 0.1210 1
2019 Iran 0.0351 0.2784 1.0000 0.2914 0.2256 1
India 0.5700 0.7368 1.0000 0.7607 0.1355 3

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Fig. 2  Mean efficiency scores

by year: India vs Iran

in which y(t) = y(t) + y(t) . 2012 to 2013, which was caused by the economic recession
o 1o 2o
A statistical summary of the TE for general insurers for in the years 2013 to 2014. Immediately after that, from 2014
h = 1, H = 20 and h = 21, H = 40 are displayed in Table 5. to 2015, there is an ascending jump in TE, and after that, we
To figurate the average technical efficiency of the insurers again face a decline in TE year after year. This is probably
in different years, the results are plotted in Fig. 1. Table 5 because in 2014, the optimistic view of international rela-
revealed that in Indian market, except 2016–2017, the mean tions and the nuclear agreement led to economic prosper-
efficiency improved, slightly. However, in Iranian market, ity, and in this sense, the performance of business sectors
the mean efficiency has improved during 2014 to 2015, and such as insurance companies came out of recession. But the
it suddenly dropped sharply from 2015 to 2019. failure in the nuclear negotiations aggravated the economic
We pooled both countries in a whole sample and then, stagnation in Iran. The results obtained from BCC model
the technical efficiency scores are calculated. The summary indicated that the output income from investment in Iranian
statistic of the results is listed in Table 6. The results show market is decreased in 2014 and 2017. As Fig. 2 represents,
that except for 2015, in all other periods, the mean TE scores these reductions directly affected on the TE scores. The reve-
in Iranian market were less than the scores in Indian market. nue efficiencies obtained from Model 4 are listed in Table 7.
These results support the first part of H2.
The mean TE scores of both countries in different years 5.4 The effect of contextual variables
are portrayed in Fig. 1. The results of the efficiency analysis
showed that the average TE in Indian insurance companies In this section, we analyze the impact of the previous-
increases almost uniformly with a smooth slope. However, mentioned contextual (explanatory) variables on effi-
the mean TE scores in Iranian market were highly fluctuated. ciency. It is worthy to note that the BCC TE scores are
These fluctuations in TE of the insurers are probably due bounded from both sides. Hence, in the second stage,
to the lack of a sustainable economy in Iran. Specifically, in the logarithm of this efficiency score is regressed on the
Iranian market, we faced a decrease in efficiency in the years previous-mentioned contextual variables. The log of TE
score is regressed on contextual variables in three different

Table 7  Revenue efficiencies of Country Indicator 2013 2014 2015 2016 2017 2018 2019
the insurers (Model 3) (Pooled
data) Iran Min 0.0900 0.0740 0.1770 0.0680 0.1050 0.0310 0.0310
Med 0.4480 0.4305 0.5495 0.4810 0.5080 0.2725 0.2690
Max 1.0000 0.8510 1.0000 1.0000 0.9840 1.0000 1.0000
Mean 0.5095 0.4702 0.6282 0.5533 0.5428 0.2739 0.2698
STD 0.2566 0.2225 0.2663 0.2735 0.2408 0.2184 0.2176
India Min 0.2590 0.2490 0.2760 0.2930 0.3390 0.3420 0.4040
Med 0.4360 0.4715 0.5155 0.5440 0.5340 0.5595 0.5825
Max 1.0000 0.8700 0.9000 1.0000 1.0000 1.0000 1.0000
Mean 0.5149 0.5074 0.5442 0.5970 0.5794 0.5822 0.5999
STD 0.2312 0.1897 0.1850 0.2193 0.1638 0.1675 0.1422

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Table 8  OLS results in Indian Particulars Coefficient Std. Error t-ratio p value
market. Source: Calculated
Intercept − 0.1574 0.0880 − 1.7896 0.0759
Market share 0.6237 0.3609 1.7283 0.0863
Solvency ration 0.0345 0.0107 3.2301 0.0016
Insurer Age 0.0014 0.0009 1.5145 0.1323
Insurer size − 0.0159 0.0151 − 1.0528 0.2944
TSD-2013 0.0000 0.0000 65,535.0000 #NUM!
TSD-2014 0.0111 0.0207 0.5350 #NUM!
TSD-2015 0.0217 0.0214 1.0140 0.3125
TSD-2016 0.0386 0.0217 1.7808 0.0773
TSD-2017 0.0238 0.0230 1.0333 0.3034
TSD-2018 0.0209 0.0237 0.8812 0.3798
TSD-2019 0.0456 0.0242 1.8836 0.0619
R-squared 0.2883
Adjusted R-squared 0.2254
Sum squared residual 0.5100
Standard error of regression 0.0629

samples: Iran, India and both countries. The results are Now, we come to measure the impact of contextual vari-
presented in Tables 8, 9, 10, 11, 12. ables on the log10 of BCC efficiencies. A summary sta-
Tables 8 and 9 revealed that two variables- market share tistic of the results appeared in Tables 10–11. In this case,
and solvency ratio- are statistically significant. the variable market share plays key role. The coefficient
In particular, the market share in the Indian market is 0.1176 for this variable means that the percent change in
significant. TE score associated with a one-unit growth in this vari-
Table 10 presents the means and standard deviations of able is 100*(e^0.1176 − 1) = 12.5. The next significant
the managerial ability. Column 6 reveals that except for variable is solvency ratio with the coefficient of 0.0956.
the years of 2015 and 2016, in other years, the average This means that one unit growth in solvency ratio leads to
managerial ability of Indian companies was higher than 10.03% growth in mean managerial ability.
the average ability of Iranian companies. This is depicted As Fig. 3 shows, the mean of managerial ability in
in Fig. 3. Iranian companies is higher than the scores in Indian

Table 9  OLS results in Iranian Particulars Coefficient Std. Error t-ratio p value
market Source: Calculated
Intercept − 1.0399 0.2984 − 3.4847 0.0007
Market share 0.1918 0.4937 0.3885 0.6983
Solvency ration 0.0786 0.0262 2.9959 0.0033
Insurer Age 0.0017 0.0020 0.8485 0.3977
Insurer size 0.0799 0.0444 1.7998 0.0742
TSD-2013 0.0237 0.0937 0.2526 0.8010
TSD-2014 0.0000 0.0000 65,535.0000 #NUM!
TSD-2015 0.1877 0.0937 2.0026 #NUM!
TSD-2016 0.1093 0.0940 1.1637 0.2467
TSD-2017 0.0837 0.0950 0.8809 0.3800
TSD-2018 − 0.2741 0.0955 − 2.8696 0.0048
TSD-2019 − 0.2930 0.0964 − 3.0399 0.0029
R-squared 0.3055
Adjusted R-squared 0.2439
Sum squared residual 11.2913
Standard error of regression 0.2959

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Table 10  Summary statistic of Year Country Min Median Max Mean STD
managerial ability in Iran and
India (country by country) 2013 Iran − 0.5776 − 0.0046 0.4017 1.72E − 16 0.2408
India − 0.0915 0.0011 0.1535 − 4E − 17 0.0555
2014 Iran − 0.6178 − 0.0135 0.3125 2.25E − 16 0.2481
India − 0.0717 0.0048 0.1660 − 5E − 17 0.0513
2015 Iran − 0.6520 0.0366 0.3304 6.11E − 17 0.2461
India − 0.1125 − 0.0140 0.1609 − 3.5E − 17 0.0795
2016 Iran − 0.5799 0.0258 0.3463 9.44E − 17 0.2306
India − 0.1085 0.0077 0.1271 − 3.9E − 17 0.0654
2017 Iran − 0.2659 − 0.0675 0.2483 1.97E − 16 0.1668
India − 0.1045 − 0.0079 0.1353 − 5.3E − 17 0.0581
2018 Iran − 0.8179 0.1156 0.5967 1.17E − 16 0.4109
India − 0.0816 0.0076 0.1102 − 5.6E − 17 0.0510
2019 Iran − 0.8081 0.1161 0.6024 0.0000 0.4054
India − 0.0837 − 0.0070 0.1234 − 6E − 17 0.0674

Table 11  Summary of OLS Particulars Coefficient Std. Error t-ratio p value

regression results (Pooled data)
Source: Calculated Intercept − 1.1404 0.1508 − 7.5638 0.0000
Market share 0.1176 0.3792 0.3101 0.7567
Solvency ration 0.0956 0.0181 5.2811 0.0000
Insurer Age − 0.0008 0.0015 − 0.5583 0.5771
Insurer size 0.0799 0.0221 3.6136 0.0004
TSD-2013 0.1590 0.0567 2.8038 0.0054
TSD-2014 0.1449 0.0560 2.5896 0.0101
TSD-2015 0.2374 0.0555 4.2800 0.0000
TSD-2016 0.2080 0.0553 3.7598 0.0002
TSD-2017 0.1769 0.0554 3.1911 0.0016
TSD-2018 − 0.0119 0.0549 − 0.2178 0.8278
TSD-2019 0.0000 0.0000 65,535.0000 0.0000
R-squared 0.2553
Adjusted R-squared 0.2239
Sum squared residual 16.1820
Standard error of regression 0.2453

companies. This clearly supports the second part of our At the end of this research, in order to check the validity
second hypothesis. of our results, we have regressed return on equity on four
In 2013, the mean managerial ability of Indian mar- variables: managerial ability, market share, solvency ratio
ket was calculated as − 0.13698, which was the minimal. and a time series dummy. The OLS regression results are
However, the minimum average managerial ability in Ira- summarized in Table 13.
nian market occurred in 2018 with a score of − 0.08106. The results obtained from our regression analysis show
Taking a look at the STD results of column 4 in Table 11, that three variables, market share, solvency ratio and mana-
we see that the variance of managerial ability in Iranian gerial ability, are statistically significant. In other words,
market is three times that of Indian companies. This sup- efforts to increase market share and managerial ability
ports our first hypothesis. directly lead to a significant increase in return on equity.
From the regression output, we can see that the regression

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Table 12  Summary statistic of Year Mean STD Min Max

managerial ability: India vs Iran
Source: Calculated India 2013 − 0.35211 0.055005 0.334869 0.037461 0.141315
2014 − 0.17598 0.041052 0.281248 0.043911 0.116304
2015 − 0.29914 − 0.05241 0.215907 − 0.0628 0.132863
2016 − 0.27965 − 0.0045 0.157816 − 0.01046 0.121679
2017 − 0.12347 − 0.02537 0.176268 − 0.00015 0.081523
2018 0.077132 0.196784 0.336131 0.196466 0.069452
2019 0.093561 0.217437 0.375864 0.223082 0.081314
Iran 2013 − 0.5972 − 0.0475 0.3599 − 0.0375 0.2260
2014 − 0.6497 − 0.0448 0.2801 − 0.0439 0.2363
2015 − 0.5754 0.1262 0.3905 0.0628 0.2518
2016 − 0.5593 0.0114 0.3582 0.0105 0.2405
2017 − 0.2457 − 0.0240 0.2690 0.0002 0.1553
2018 − 0.9979 − 0.0571 0.4605 − 0.1965 0.3978
2019 − 1.0173 − 0.0901 0.4382 − 0.2231 0.3944
Total

Fig. 3  Managerial Ability: country by country Fig. 4  Managerial ability: India vs Iran

Table 13  OLS regression of return on equity on managerial ability.

Source: Calculated
Particulars Coefficient Std. Error t-ratio p value

Intercept − 0.239457 0.070562 3.393564 0.000793

Market share 0.68864 0.405811 − 1.69694 0.09086
Solvency ratio 0.02294 0.025227 − 0.90933 0.363986
Time series dummy − 0.010511 0.009495 1.106946 0.26951
OLS residual 0.00754 0.087387 − 0.08632 0.931276
(Managerial
ability)
R-squared 0.31808
Adjusted R-squared − 0.0417
Fig. 5  Relationship between return on equity and managerial ability
s(× 1) = ROE, X1 = Managerial Ability
coefficient for managerial ability is 0.00754. This means
that, on average, each additional ability in management
is associated with an increase of 0.00754 on the return on Now, we use general additive model (GAM) to test the
equity, assuming the other predictor variables are held con- validity of the relationship between managerial ability and
stant. Our regression experience has relatively high level of return on equity. The graph of the relationship between
R-squared. These results support our third hypothesis. managerial ability and return on equity is depicted in

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 Information Technology and Management

Table 14  GAM results Source: Significance of parametric coefficients Estimate Std. Error t-ratio p value
Calculated
Intercept 0.7073 0.0779 9.0790 0.0000
Significance of smooth terms edf Ref.df F p value
S(MA) 5.152 6.316 12.12 0
TSD 0.0048 0.0104 0.4590 0.6460
Country dummy − 0.3633 0.0426 − 8.5220 0.0000
R-squared (Adjusted) 0.296
Generalized Cross Validation 0.1147
Scale estimate 0.1113

Fig. 4. (Note that we assumed that s(× 1) = Return on equity markets, they include few players in the market. Second,
and × 1 = Managerial Ability) (Fig. 5). our data set is related to a 7-year period. We recommend
As the figure shows, there is a positive relationship that researchers consider insurer-wise productivity over
between return on equity and managerial ability. a longer period (minimum 10-year period) to obtain a
Table 14 provided the outcomes obtained from the Gen- stronger measure of management ability.
eral Additive Model. Three potential avenues for future research emerge from
Now, we use the cross-validation method to test the ability this research: First, the current paper studied the problem
of the model. In the context of linear regression, the cross- of estimating managerial ability with crisp data. However,
validation method, introduced by Allen [3], is a general proce- in real-life situations, the general processes may often be
dure to test the ability of the model in predicting unobserved uncertain in nature. Therefore, when there are variations
data. In this experience, the Generalised Cross Validation in data because of uncertainty, the efficiency analysis
(GCV) score of the GAM is computed as a weighted ver- and managerial ability estimation in deterministic form
sion of cross-validation. Smaller values of GCV indicate bet- becomes sensitive to such variations. So, we suggest the
ter model fitting. As the results in Table 14 shows, the GCV investigation of uncertainty in data. Second, DEA has been
value is obtained as 0.1174 that is relatively a good measure. widely used in modeling two-stage production processes.
Overall, as we expected, the relationship between managerial To analyze the relative efficiency and managerial ability in
ability and return on equity is substantially significant. the presence of fuzzy or stochastic data, a research study
can be developed to two-stage network production technol-
ogies. Third, a research study can be extended to evaluate
6 Concluding remarks the relative efficiency and managerial ability in general or
life insurance companies when there are undesirable and
Research studies on how to evaluate the managerial abil- non-discretionary factors in uncertain environment.
ity of a set of DMUs have been conducted for a long time,
Acknowledgements The authors would like to thank the Editor-in-
and different studies have been proposed in the literature Chief, Associate Editor, and anonymous reviewers for their helpful
to calculate managerial ability in performance measure- comments on the previous version of this manuscript.
ment models. In this article we studied the problem of cal-
culating managerial ability in DEA framework to evaluate Funding There is no research funding for this research.
relative efficiency and managerial ability in the context of Availability of data and materials All data used in this paper are avail-
general insurance sectors in Iran and India. The results of able per request.
this research revealed that that the Indian general insurance
market has a relative stability, while, the Iranian market has Declarations
been highly fluctuated. Moreover, in almost all years, the
Conflict of interest On behalf of my co-authors, I declare that we have
average technical and allocative efficiencies and managerial no known competing financial interests or personal relationships that
ability scores of Iranian markets were less than the scores could have appeared to influence the work reported in this paper.
of Indian markets. Our results showed that three variables,
market share, solvency ratio and managerial ability, are sta-
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