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Determinants of Insurers' Performance in Risk Pooling, Risk Management, and Financial Intermediation Activities

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  • Georges Dionne
  • Robert Gagné
  • Abdelhakim Nouira

Abstract

Corporate finance theory predicts that firms' characteristics affect agency costs and hence their efficiency. Cummins et al. (2006) have proposed a cost function specification that measures separately insurer efficiency in handling risk pooling, risk management, and financial intermediation functions. We investigate the insurer characteristics that determine these efficiencies. Our empirical results show that mutuals outperform stock insurers in handling the three functions. Independent agents and high capitalization reduce the cost efficiency of risk pooling. Certain characteristics such as being a group of affiliated insurers, handling a higher volume of business in commercial lines, assuming more reinsurance or investing a higher proporotion of assets in bonds, do significantly increase insurers' efficiency in risk management and financial intermediation.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0715.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0715

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Keywords: Risk pooling; risk management; financial intermediation; property-liability insurance; efficiency; agency costs;

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