IMPACT OF MANAGERIAL ABILITY ON FIRM PERFORMANCE AND RISK-TAKING: EVIDENCE FROM THE GERMAN INSURANCE SECTOR USING A THREE-STAGE EFFICIENCY FRAMEWORK

Abstract

Managerial ability is increasingly acknowledged as a critical determinant of firm performance, particularly in highly regulated and risk-intensive sectors such as insurance. This study examines the estimation of managerial ability within the German insurance industry through a comprehensive three-stage framework that integrates Data Envelopment Analysis (DEA), regression analysis, and residual-based evaluation. The panel dataset, spanning 2014 to 2023, isolates managerial ability by identifying deviations from predicted technical efficiency levels. Adopting a quantitative, explanatory research design, the study analyzes a balanced panel of 1,200 firm-year observations drawn from licensed German insurance firms over the period 2014–2023, selected using purposive sampling based on data availability and reporting consistency. The empirical results reveal substantial heterogeneity in both managerial competence and operational efficiency across firms, with firm size and market share emerging as significant positive contributors to efficiency. Specifically, second-stage regression results show that firm size (0.112, p < 0.001) and market share (0.067, p = 0.004) significantly enhance technical efficiency, while managerial ability exhibits a statistically significant positive effect on firm performance. The study identifies a robust and statistically significant positive association between managerial ability and firm performance, as proxied by return on equity (ROE), with Generalized Additive Model (GAM) estimates indicating a positive non-linear effect of managerial ability on ROE (s(MA) = 0.12, p = 0.002). The study concludes by recommending greater integration of managerial ability metrics into governance and supervisory frameworks, alongside targeted managerial development initiatives to sustain long-term performance improvements.