Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency and Productivity Methods

Abstract

This chapter reviews the modern frontier efficiency and productivity methodologies that have been developed to analyze firm performance, emphasizing applications to the insurance industry. The focus is on the two most prominent methodologies—stochastic frontier analysis using econometrics and non-parametric frontier analysis using mathematical programming. The chapter considers the underlying theory of the methodologies as well as estimation techniques and the definition of inputs, outputs, and prices. Seventy-four insurance efficiency studies are identified from 1983 to 2011, and 37 chapters published in upper tier journals from 2000 to 2011 are reviewed in detail. Of the 74 total studies, 59.5% utilize data envelopment analysis as the primary methodology. There is growing consensus among researches on the definitions of inputs, outputs, and prices.