Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • J. David Cummins
  • Georges Dionne
  • Robert Gagné
  • 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 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2006/CIRPEE06-16.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0616.

as in new window
Length:
Date of creation: 2006
Date of revision:
Handle: RePEc:lvl:lacicr:0616

Contact details of provider:
Postal: CP 8888, succursale Centre-Ville, Montréal, QC H3C 3P8
Phone: (514) 987-8161
Web page: http://www.cirpee.org/
More information through EDIRC

Related research

Keywords: Risk management; US property-liability insurer; risk pooling; financial intermediation; economic efficiency; intermediate output; shadow price; cost function; translog approximation;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Doherty, Neil A & Schlesinger, Harris, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 243-53, February.
  2. Georges Dionne, 2003. "The Foundations of Banks' Risk Regulation: a Review of the Literature," Cahiers de recherche 0346, CIRPEE.
  3. Berger, Allen N & Cummins, J David & Weiss, Mary A, 1997. "The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance," The Journal of Business, University of Chicago Press, vol. 70(4), pages 515-46, October.
  4. J. David Cummins & Richard D. Phillips & Stephen D. Smith, 1996. "Corporate hedging in the insurance industry: the use of financial derivatives by U.S. insurers," Working Paper 96-19, Federal Reserve Bank of Atlanta.
  5. Paul J. M. Klumpes, 2004. "Performance Benchmarking in Financial Services: Evidence from the UK Life Insurance Industry," The Journal of Business, University of Chicago Press, vol. 77(2), pages 257-274, April.
  6. Brewer, Elijah, III & Jackson, William E, III & Moser, James T, 1996. "Alligators in the Swamp: The Impact of Derivatives on the Financial Performance of Depository Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 482-97, August.
  7. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
  8. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Claudia Girardone & Philip Molyneux & Edward Gardener, 2004. "Analysing the determinants of bank efficiency: the case of Italian banks," Applied Economics, Taylor & Francis Journals, vol. 36(3), pages 215-227.
  10. Clark, Jeffrey A & Siems, Thomas F, 2002. "X-Efficiency in Banking: Looking beyond the Balance Sheet," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 987-1013, November.
  11. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-76.
  12. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
  13. Kevin C. Ahlgrim & Stephen P. D'Arcy & Richard W. Gorvett, 2004. "The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 29(1), pages 75-108, June.
  14. John Drzik, 2005. "New Directions in Risk Management," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 26-36.
  15. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
  16. Catherine Schrand & Haluk Unal, 1998. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions," Journal of Finance, American Finance Association, vol. 53(3), pages 979-1013, 06.
  17. Dionne, G. & Garand, M., 2000. "Risk Management Determinants Affecting Firms' Values in the Gold Mining Industry: New Empirical Results," Ecole des Hautes Etudes Commerciales de Montreal- 00-11, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
  18. Dionne, G. & Gane, R. & Vanasse, C., 1995. "Infessing Technological Parameters from Incomplete Panel Data," Cahiers de recherche 9537, Universite de Montreal, Departement de sciences economiques.
  19. Jose Pastor & Lorenzo Serrano, 2005. "Efficiency, endogenous and exogenous credit risk in the banking systems of the Euro area," Applied Financial Economics, Taylor & Francis Journals, vol. 15(9), pages 631-649.
  20. Georges Dionne & Thouraya Triki, 2004. "On Risk Management Determinants: What Really Matters?," Cahiers de recherche 0417, CIRPEE.
  21. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  22. Casu, Barbara & Girardone, Claudia & Molyneux, Philip, 2004. "Productivity change in European banking: A comparison of parametric and non-parametric approaches," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2521-2540, October.
  23. Bernhard Mahlberg & Thomas Url, 2003. "Effects of the single market on the Austrian insurance industry," Empirical Economics, Springer, vol. 28(4), pages 813-838, November.
  24. J. David Cummins, 2008. "CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 23-47, 03.
  25. J. David Cummins & Richard D. Phillips & Stephen D. Smith, 1998. "Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry," Center for Financial Institutions Working Papers 98-19, Wharton School Center for Financial Institutions, University of Pennsylvania.
  26. Barbara Casu & Claudia Girardone, 2005. "An analysis of the relevance of off-balance sheet items in explaining productivity change in European banking," Applied Financial Economics, Taylor & Francis Journals, vol. 15(15), pages 1053-1061.
  27. J. David Cummins & Mary A. Weiss, 1998. "Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency Methods," Center for Financial Institutions Working Papers 98-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
  28. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December.
  29. 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 06-06, HEC Montréal, Institut d'économie appliquée.
  30. DeMarzo,Peter & Duffie,Darrel, 1989. "Corporate financial hedging with proprietary information," Discussion Paper Serie A 222, University of Bonn, Germany.
  31. Georges Dionne & Thouraya Triki, 2005. "Risk Management and Corporate Governance: the Importance of Independence and Financial Knowledge for the Board and the Audit Committee," Cahiers de recherche 0515, CIRPEE.
  32. Allen N. Berger & J. David Cummins & Mary A. Weiss & Hongmin Zi, 1999. "Conglomeration versus strategic focus: evidence from the insurance industry," Finance and Economics Discussion Series 1999-40, Board of Governors of the Federal Reserve System (U.S.).
  33. J. David Cummins & Mary A. Weiss & Hongmin Zi, 1998. "Organizational form and efficiency: an analysis of stock and mutual property-liability insurers," Working Papers 98-19, Federal Reserve Bank of Philadelphia.
  34. David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
  35. J. Cummins & Gregory Nini, 2002. "Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry," Journal of Financial Services Research, Springer, vol. 21(1), pages 15-53, February.
  36. Fenn, Paul & Vencappa, Dev & Diacon, Stephen & Klumpes, Paul & O'Brien, Chris, 2008. "Market structure and the efficiency of European insurance companies: A stochastic frontier analysis," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 86-100, January.
  37. Robert C. Merton & André Perold, 1993. "Theory Of Risk Capital In Financial Firms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 16-32.
  38. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  39. Karl C. Ennsfellner & Danielle Lewis & Randy I. Anderson, 2004. "Production Efficiency in the Austrian Insurance Industry: A Bayesian Examination," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(1), pages 135-159.
  40. J. David Cummins & Mary A. Weiss & Hongmin Zi, 1999. "Organizational Form and Efficiency: The Coexistence of Stock and Mutual Property-Liability Insurers," Management Science, INFORMS, vol. 45(9), pages 1254-1269, September.
  41. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2008. "The Costs and Benefits of Reinsurance," Cahiers de recherche 08-04, HEC Montréal, Institut d'économie appliquée.
  42. Halvorsen, Robert & Smith, Tim R, 1991. "A Test of the Theory of Exhaustible Resources," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 123-40, February.
  43. Nelson, James M. & Moffitt, Jacquelyn Sue & Affleck-Graves, John, 2005. "The impact of hedging on the market value of equity," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 851-881, October.
  44. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  45. Kevin C. Ahlgrim & Stephen P. D'Arcy & Richard W. Gorvett, 2004. "The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 29(1), pages 75-108, 06.
  46. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
  47. Cummins, J. David & Rubio-Misas, Maria & Zi, Hongmin, 2004. "The effect of organizational structure on efficiency: Evidence from the Spanish insurance industry," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3113-3150, December.
  48. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, 04.
  49. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.).
  50. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
  51. Doherty, Neil A & Dionne, Georges, 1993. " Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 187-203, April.
  52. J. David Cummins & Hongmin Zi, 1997. "Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry," Center for Financial Institutions Working Papers 97-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
  53. Chermak, Janie M. & Patrick, Robert H., 2001. "A Microeconometric Test of the Theory of Exhaustible Resources," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 82-103, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.
  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, vol. 13(1), pages 61-76, January.
  3. Saowaros Yaisawarng & Preecha Asavadachanukorn & Suthathip Yaisawarng, 2014. "Efficiency and productivity in the Thai non-life insurance industry," Journal of Productivity Analysis, Springer, vol. 41(2), pages 291-306, April.
  4. Gaganis , Chrysovalantis & Hasan, Iftekhar & Pasiouras , Fotios, 2013. "Efficiency and stock returns: Evidence from the insurance industry," Research Discussion Papers 14/2013, Bank of Finland.
  5. M. Martin Boyer & Charles M. Nyce, 2011. "An Industrial Organization Theory of Risk Sharing," CIRANO Working Papers 2011s-78, CIRANO.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:lvl:lacicr:0616. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanne Perron).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.