Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency and Productivity Methods

Abstract

The objective of this paper is to discuss the use of modern frontier efficiency analysis to analyze firm performance in the insurance industry. The objective is to provide the foundations for insurance economists to use in adapting their research to incorporate the frontier efficiency approach. The chapter also serves as a guide for those who are already conducting frontier efficiency analysis but are seeking guidance in using the methodology or defining inputs and outputs. We describe and analyze the principal methodologies that have been developed for measuring efficiency and productivity, defining the input and output concepts required to apply the methodologies to insurers. We also survey the empirical literature on efficiency and productivity measurement in insurance.

Keywords: Insurance, insurance firms, efficiency, productivity, data envelopment analysis, stochastic frontier analysis

JEL Classification: D24, L22, G20, G21, G22