Issues in Measuring the Efficiency of Property-Liability Insurers

41 Pages Posted: 4 May 2006

See all articles by J. Tyler Leverty

J. Tyler Leverty

University of Wisconsin - Madison

Martin F. Grace

Temple University - Fox School of Business & Management

Date Written: November 10, 2006

Abstract

We evaluate the two main methods to measuring property-liability insurer efficiency: the production and "flow" (or financial intermediation) approaches. The two approaches are not mutually consistent and thus potentially yield different answers to tested hypotheses. The production approach is more closely related to traditional measures of firm performance — return on assets, return on equity, and expense to premium ratio. In addition, efficient production approach firms are generally significantly less likely to fail, while firms characterized as efficient by the flow approach are generally more likely to fail. Further, we test output definitions and find the theoretical concern regarding the production approach's use of losses as a measure of output is not validated empirically.

Keywords: Insurance, Objectives of the Firm, Data Envelopment Analysis, Range Adjusted Measure

JEL Classification: G22, L21, L23, L25

Suggested Citation

Leverty, J. Tyler and Grace, Martin F., Issues in Measuring the Efficiency of Property-Liability Insurers (November 10, 2006). Available at SSRN: https://ssrn.com/abstract=899197 or http://dx.doi.org/10.2139/ssrn.899197

J. Tyler Leverty (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Martin F. Grace

Temple University - Fox School of Business & Management ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

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