Effects of Risk Management on Cost Efficiency and Cost Function of the U.S. Property and Liability Insurers

Hong-Jen Lin, Min-Ming Wen and Charles Yang

North American Actuarial Journal, 2011, vol. 15, issue 4, 487-498

Abstract: This paper adopts the one-step stochastic frontier approach to investigate the impact of risk management tools of derivatives and reinsurance on cost efficiency of U.S. property-liability insurance companies. The stochastic frontier approach considers both the mean and variance of cost efficiency. The sample includes both stock and mutual insurers. Among the findings, the cost function of the entire sample carries the concavity feature, and insurers tend to use financial derivatives for firm value creation. The results also show that for the entire sample the use of derivatives enhances the mean of cost efficiency but accompanied with larger efficiency volatility. Nevertheless, the utilization of financial derivatives mitigates efficiency volatility for mutual insurers. This research provides important insights for the practice of risk management in the property-liability insurance industry.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/10920277.2011.10597634 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uaajxx:v:15:y:2011:i:4:p:487-498

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/uaaj20

DOI: 10.1080/10920277.2011.10597634

Access Statistics for this article

North American Actuarial Journal is currently edited by Kathryn Baker

More articles in North American Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().