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Assessing the Efficiency of an Insurance Provider—A Measurement Error Approach

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  • Mario Jametti

    (McMaster University, 1280 Main Street West, Hamilton, Ontario, L8S 4M4, Canada, e-mail: jametti@mcmaster.ca)

  • Thomas von Ungern-Sternberg

    (HEC-Universit� de Lausanne and CESifo, BFSH1, 1015 Lausanne, Switzerland, e-mail: Thomas.vonUngern-Sternberg@unil.ch)

Abstract

The purpose of this paper is to compare the cost efficiency of private and public property insurance providers in Switzerland. The most commonly used measure for this kind of exercise is the claims-premium ratio. We argue that this measure may give strongly biased results. We develop a simple model to test whether the elasticity of premiums with respect to claims is less than unity. We address the fact that premium income is relatively stable across time, while claims are not, using estimation techniques that correct for measurement error. We develop tools to cope with heteroskedasticity in such measurement errors and apply the model to a data set on 19 firms in housing insurance markets in Switzerland. We show that the public insurance providers are about 20% more cost efficient than their private counterparts. The Geneva Risk and Insurance Review (2005) 30, 15–34. doi:10.1007/s10836-005-1105-4

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Article provided by Palgrave Macmillan in its journal The Geneva Risk and Insurance Review.

Volume (Year): 30 (2005)
Issue (Month): 1 (June)
Pages: 15-34

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Handle: RePEc:pal:genrir:v:30:y:2005:i:1:p:15-34

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References

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  1. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc.
  2. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, Econometric Society, vol. 65(3), pages 557-586, May.
  3. Thomas VON UNGERN-STERNBERG, 1994. "Die kantonalen Gebäudeversicherungen. Eine ökonomische Analyse," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9405, Université de Lausanne, Faculté des HEC, DEEP.
  4. Ramses H. Abul Naga, 2001. "Galtonian Regression of Intergenerational Income Linkages: Biased Procedures, a New Estimator and Mean-Square Error Comparisons," STICERD - Distributional Analysis Research Programme Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 53, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Meijer, Erik & Wansbeek, Tom, 2000. "Measurement error in a single regressor," Economics Letters, Elsevier, Elsevier, vol. 69(3), pages 277-284, December.
  6. Felder, Stefan, 1996. "Fire insurance in Germany: A comparison of price-performance between state monopolies and competitive regions," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1133-1141, April.
  7. von Ungern-Sternberg, Thomas, 2004. "Efficient Monopolies: The Limits of Competition in the European Property Insurance Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199268818, October.
  8. Wansbeek, T.J. & Kapteyn, A.J., 1984. "Errors in variables. Consistent adjusted least squares (CALS) estimation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364321, Tilburg University.
  9. Epple, Karl & Schafer, Reinhard, 1996. "The transition from monopoly to competition: The case of housing insurance in Baden-Wurttemberg," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1123-1131, April.
  10. Thomas VON UNGERN-STERNBERG, 1995. "Kritische Überlegungen zu dem Gutachten von Professor Schips über die kantonalen Gebäudeversicherungsmonopole," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9502, Université de Lausanne, Faculté des HEC, DEEP.
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Cited by:
  1. Annette Hofmann, 2007. "Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks," The Geneva Papers on Risk and Insurance Theory, Springer, Springer, vol. 32(1), pages 91-111, June.
  2. Hofmann, Annette, 2005. "Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks," Working Papers on Risk and Insurance 16, University of Hamburg, Institute for Risk and Insurance.
  3. Mario Jametti & Thomas von Ungern-Sternberg, 2009. "Hurricane Insurance in Florida," Quaderni della facoltà di Scienze economiche dell'Università di Lugano, USI Università della Svizzera italiana 0905, USI Università della Svizzera italiana.

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