determinants of insurers’ performance in risk pooling, risk.pdf

Determinants of Insurers’ Performance in Risk Pooling, Risk Management, and Financial Intermediation Activities* § Georges Dionne , Robert Gagné and Abdelhakim Nouira HEC Montréal 30 April 2007 * Financial support by CREF and Canada Research Chair in Risk Management, HEC Montréal, is acknowledged. § Corresponding author. Canada Research Chair in Risk Management, HEC Montréal. 3000, Chemin Cote-Ste-Catherine, Montreal (Qc), Canada, H3T 2A7. Phone: 514-340-6506. Fax: 514-340-5019. georges.dionne@hec.ca. 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 codes: D21, D23, G22.