Insurance companies risk-adjusted efficiency using a composite risk management index

Danijel Petrović, Apostolos Dasilas and Goran Karanović

Review of Accounting and Finance, 2025, vol. 25, issue 1, 52-74

Abstract: PurposeThis study investigates the relationship between risk management practices and operational efficiency in insurance companies using risk-adjusted efficiency data from a sample of 744 insurers from 2012 to 2021. This study aims to determine how specific risk management practices impact operating efficiency.Design/methodology/approachA Data Envelopment Analysis “Benefit-of-the-Doubt” model is used to construct a risk management index (RMI) composed of five sub-indicators: capital adequacy, asset quality, management efficiency, earnings and solvency. This proposed RMI assesses the relationship between insurers’ risk management practices and operational efficiency.FindingsThe findings indicate a positive and statistically significant relationship between RMI solvency and operational efficiency. In contrast, the other RMI components demonstrate a significant but negative relationship with operational efficiency, implying that the composite RMI is an effective tool for ranking and comparing the quality of insurers’ risk management practices.Originality/valueTo the best of the authors’ knowledge, this study is among the first to develop an RMI for estimating risk-adjusted efficiency for insurance companies. By using RMI as a performance measure instead of conventional profitability ratios, this methodology underscores critical areas for the improvement of risk management practices, including capital adequacy and solvency.

Keywords: Insurance companies; Composite risk management index; DEA BoD; Risk-adjusted efficiency (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-11-2024-0492

DOI: 10.1108/RAF-11-2024-0492

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