Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities

John Cummins, Georges Dionne (), Robert Gagné () and Abdelhakim Nouira
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Robert Gagné: IEA, HEC Montréal, http://www.hec.ca/iea/

No 06-06, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

Abstract: Risk management is now present in many economic sectors. This paper investigates the role of risk management in creating value for financial institutions by analyzing U.S. property-liability insurers. Property-liability insurers are financial intermediaries whose primary role in the economy is risk pooling and risk bearing. The risk pooling and risk bearing functions performed by insurers are the primary determinants of the need for risk management. The main goal of this paper is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency. Insurer cost efficiency is measured relative to an econometric cost frontier. Since the prices of risk management and financial intermediation services are not observable, we consider these two activities as intermediate outputs and estimate their shadow prices. The shadow prices isolate the contributions of risk management and financial intermediation to insurer cost efficiency. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.

Pages: 43 pages
Date: 2006-04
New Economics Papers: this item is included in nep-eff, nep-ias and nep-rmg
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Efficiency of insurance firms with endogenous risk management and financial intermediation activities (2009)
Working Paper: Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities (2006)
Working Paper: Efficiency of insurance firms with endogenous risk management and financial intermediation activities (2006)
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