Performance of European insurance firms in the single insurance market

The deregulation and liberalization process towards establishing a single European financial market has some important implications for the insurance industries. Due to the increased competition, insurance firms have to adjust their costs and operate efficiently to survive in this new environment. This paper attempts to analyze the cost efficiency and scale economies in the single European insurance market. Considering the ongoing enlargement process of the EU, our sample includes the insurance industries of the major EU-15, four new members and a candidate country, Turkey, over the period 1995-2005. We use the firm-level financial data and estimate a stochastic cost frontier that controls for differences in environmental conditions. All insurance systems display significant levels of cost inefficiency. The results further indicate that there are significant economies of scale, particularly for small-and medium-size insurance firms. Finally, the analyses suggest similar results for major EU countries, new members and the candidate.