Efficiency of insurance firms with endogenous risk management and financial intermediation activities

Efficiency of insurance firms with endogenous risk management and financial intermediation activities

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Article ID: iaor200971387
Country: Netherlands
Volume: 32
Issue: 2
Start Page Number: 145
End Page Number: 159
Publication Date: Oct 2009
Journal: Journal of Productivity Analysis
Authors: , , ,
Keywords: risk, performance
Abstract:

Risk management is now present in many economic sectors. However, none of existing studies consider risk management as a potential determinant of firm performance. In this paper, we investigate the role of risk management and financial intermediation in creating value for financial institutions by analyzing U.S. property-liability insurers. Our main goal is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency through cost reductions. We consider these two activities as intermediate outputs and estimate their shadow prices. Insurer cost efficiency is measured using an econometric cost function. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.

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