Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

2-2002

Publication Source

Journal of Financial Services Research

Volume

21

Issue

1-2

Start Page

15

Last Page

53

DOI

10.1023%2FA%3A1014369617192

Abstract

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.

Copyright/Permission Statement

The final publication is available at Springer via http://dx.doi.org/10.1023/A:1014369617192

Keywords

data envelopment analysis, capital structure, efficiency property-liability insurance, organizational form

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Date Posted: 27 November 2017

This document has been peer reviewed.