Question

How might productivity be measured in the Finance and Insurance industries?

Answer 1

Production (gross output) is usually measured on the basis of the industry sales of goods
and services adjusted for changes in inventories. However, for FIS the fees for intermediation services provided by the industry are often partly or fully embedded in margins. This is the case, for example, for banks and finance companies that charge an interest rate margin on loans. The problem of measuring output also applies for insurance services, as premiums cover both a return to theinsurer for managing the risk, and a
payment to buy into the risk sharing pool. In both Finance and Insurance a value for output
has to be ‘imputed’ from available data. Where there is no other information on output,
such as in the case of the output of the Reserve Bank and in Superannuation, a measure of the cost of production is used to impute output. Hence measured output in FIS is a combination of explicit fees, charges and sales, imputed output, and other income.

A short example of INDONESIA is being taken into account. As a non-bank financial institution, the insurance company has been playing an important role in the financial industry in Indonesia. The insurance industry has contributed 1.98% to the national economy during the last ten years. During the same period, on average, the numbers of insurance companies in Indonesia and their gross premium have respectively increased by 0.02% and 18.0% annually (Financial Service Authority of Indonesia 2016). The number of businesses supporting insurance companies, such as insurance brokers, reinsurance brokers, actuarial consultants and insurance agents has also continued to increase yearly. According to Rahim (2013), conducive regulatory and government policies supporting the insurance industry as well as stable national economic condition have contributed to the increase in the number of insurance companies in Indonesia. Based on the above positive trends, it is predicted that the insurance industry in Indonesia will continue to grow in line with the national economic growth. Indonesia is one of the countries in Asian regions that have been experiencing positive growth in addition to India and China. In fact, Indonesia has been categorised as the middle-income country based on the Global Competitiveness Report of the World Economic Forum in 2011 (Rahim 2013). Obviously, this creates an opportunity as well as challenges for the insurance industry to continue increasing itsmarket share both in terms of the number of the insured and the yearly accumulated premiums. One potential target market that is potential to be captured by the companies is residents in the category of the middle class through disseminating a variety of financial schemes related to the benefits and risk management they could offer. However,
to grasp this opportunity, the company has to be able to face the competitive challenges so as to maintain and improve its performance. Thus, the insurance company should professionally manage for the sake of enhancing its efficiency and productivity levels.