Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry

Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Services Research Springer Journals

Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry

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Publisher
Springer Journals
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Finance; Financial Services; Macroeconomics/Monetary Economics//Financial Economics
ISSN
0920-8550
eISSN
1573-0735
D.O.I.
10.1023/A:1014369617192
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Financial Services ResearchSpringer Journals

Published: Oct 5, 2004

References

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