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

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  • J. David Cummins
  • Georges Dionne

    ()
    (IEA, HEC Montréal)

  • Robert Gagné

    ()
    (IEA, HEC Montréal)

  • Abdelhakim 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 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.

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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 06-06.

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Length: 43 pages
Date of creation: Apr 2006
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Handle: RePEc:iea:carech:0606

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Cited by:
  1. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, Springer, vol. 40(3), pages 429-442, December.
  2. Kwadjo Ansah-Adu & Charles Andoh & Joshua Abor, 2011. "Evaluating the cost efficiency of insurance companies in Ghana," Journal of Risk Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 13(1), pages 61-76, January.
  3. M. Martin Boyer & Charles M. Nyce, 2011. "An Industrial Organization Theory of Risk Sharing," CIRANO Working Papers, CIRANO 2011s-78, CIRANO.
  4. Saowaros Yaisawarng & Preecha Asavadachanukorn & Suthathip Yaisawarng, 2014. "Efficiency and productivity in the Thai non-life insurance industry," Journal of Productivity Analysis, Springer, Springer, vol. 41(2), pages 291-306, April.
  5. 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, HEC Montréal, Institut d'économie appliquée 06-06, HEC Montréal, Institut d'économie appliquée.

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