Date of this Version
Journal of Financial Services Research
Capitalization levels in the property-liability insurance industry have increased dramatically in recent years—the capital-to-assets ratio rose from 25% in 1989 to 35% by 1999. This paper investigates the use of capital by insurers to provide evidence on whether the capital increase represents a legitimate response to changing market conditions or a true inefficiency that leads to performance penalties for insurers. We estimate “best practice” technical, cost, and revenue frontiers for a sample of insurers over the period 1993–1998, using data envelopment analysis, a non-parametric technique. The results indicate that most insurers significantly over-utilized equity capital during the sample period. Regression analysis provides evidence that capital over-utilization primarily represents an inefficiency for which insurers incur significant revenue penalties.
The final publication is available at Springer via http://dx.doi.org/10.1023/A:1014369617192
data envelopment analysis, capital structure, efficiency property-liability insurance, organizational form
Cummins, J. D., & Nini, G. P. (2002). Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry. Journal of Financial Services Research, 21 (1-2), 15-53. http://dx.doi.org/10.1023%2FA%3A1014369617192
Date Posted: 27 November 2017
This document has been peer reviewed.