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Efficiency of insurance firms with endogenous risk management and financial intermediation activities

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  • J. Cummins

    ()

  • Georges Dionne

    ()

  • Robert Gagné

    ()

  • A. Nouira

    ()

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 roles in the economy are 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 function. 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.

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File URL: http://hdl.handle.net/10.1007/s11123-009-0131-0
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Bibliographic Info

Article provided by Springer in its journal Journal of Productivity Analysis.

Volume (Year): 32 (2009)
Issue (Month): 2 (October)
Pages: 145-159

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Handle: RePEc:kap:jproda:v:32:y:2009:i:2:p:145-159

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Web page: http://www.springerlink.com/link.asp?id=100296

Related research

Keywords: Risk management; Financial intermediation; Intermediate output; Shadow prices; Efficiency; Cost function; C33; D24; D81; G22;

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References

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Cited by:
  1. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2006. "Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities," Cahiers de recherche 0616, CIRPEE.
  2. M. Martin Boyer & Charles M. Nyce, 2011. "An Industrial Organization Theory of Risk Sharing," CIRANO Working Papers 2011s-78, CIRANO.
  3. Kwadjo Ansah-Adu & Charles Andoh & Joshua Abor, 2011. "Evaluating the cost efficiency of insurance companies in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 13(1), pages 61-76, January.

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