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

36 Pages Posted: 25 May 2007  

Georges Dionne

HEC Montreal - Department of Finance

Robert Gagné

HEC Montreal - Institute of Applied Economics

Abdelhakim Nouira

HEC Montreal - Department of Finance

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: September 14, 2007

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 proportion of assets in bonds, do significantly increase insurers' efficiency in risk management and financial intermediation.

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

JEL Classification: D21, D23, G22.

Suggested Citation

Dionne, Georges and Gagné, Robert and Nouira, Abdelhakim and Cummins, J David, Determinants of Insurers' Performance in Risk Pooling, Risk Management, and Financial Intermediation Activities (September 14, 2007). Available at SSRN: https://ssrn.com/abstract=988991 or http://dx.doi.org/10.2139/ssrn.988991

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/

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

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)

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