PurposeThis study sets out to analyze the efficiency and productivity issues of the insurance sector from both the policymakers' and investors' points of view to insulate the business and financial risks of UAE corporate houses.Design/methodology/approachThe paper uses two inputs of “administrative and general expenses”, and “equity and change in legal reserves”, versus two outputs of rate of “return on investments” and “liquid asset to total liabilities ratio” to assess the allocative efficiency of the companies using DEA. Using the the Malmquist productivity index the efficiency is broken down into technical and scale efficiency to evaluate the performance of the insurers.FindingsWhile the scale of operation of insurers is, by and large, acceptable, there is a considerable degree of managerial inefficiency among the insurers, with the least efficiency in 2000, and higher efficiency in 2004. Further, the insurers on average achieved a mere 0.8 percent annual gain in total factor productivity over the period in question.Research limitations/implicationsThe data set is narrow with 19 insurers in the region, which is the limitation.Practical implicationsThe results have policy implications for the regulators and managerial implications for the existing insurers to face the growing competition in the region.Originality/valueThis is the first study to investigate the productivity changes of insurance sector operations in a developing economy: the UAE in the Middle‐East region. The study findings help the insurers to take appropriate managerial steps to improve the efficiency of their operations.

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This study investigated cost inefficiencies and its relationship with value drivers of insurers in United Arab Emirates (UAE). The study revealed that there were 21-33% cost inefficiencies in these insurers under different model specifications of stochastic frontier and DEA; value drivers such as lower leverage risk, lower capital risk significantly improved cost efficiencies consistent with Basel II norms; ROE positively influenced cost efficiencies with further trade off between increased profit margin, decreased asset utilization and|or reduced equity multiplier by the insurer managements to achieve a target-ROE; and the trend of cost efficiency was improving during 2000-2004. The study suggests that stock insurers could overcome their cost inefficiencies through adoption of efficient measures such as risk mapping of clients, risk prioritization besides ALM techniques. The study has direct implications for individual and institutional investors in making their portfolio investment decisions in insurance sector, policymakers, and regulators to closely monitor inefficient insurers consistent with Basel II norms. Copyright © 2008 John Wiley & Sons, Ltd.

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