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

48 Pages Posted: 10 May 2006

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Robert Gagné

HEC Montreal - Institute of Applied Economics

Abdelhakim Nouira

HEC Montreal - Department of Finance

Date Written: February 2007

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.

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

JEL Classification: C33, D24, D81, G22

Suggested Citation

Dionne, Georges and Cummins, J. David and Gagné, Robert and Nouira, Abdelhakim, Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities (February 2007). Available at SSRN: https://ssrn.com/abstract=900384 or http://dx.doi.org/10.2139/ssrn.900384

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

J. David Cummins

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Robert Gagné

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Abdelhakim Nouira

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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