Issues in Measuring the Efficiency of Property-Liability Insurers

We evaluate the two main methods to measuring property-liability insurer efficiency: the production and "flow" (or financial intermediation) approaches. The two approaches are not mutually consistent and thus potentially yield different answers to tested hypotheses. The production approach is more closely related to traditional measures of firm performance — return on assets, return on equity, and expense to premium ratio. In addition, efficient production approach firms are generally significantly less likely to fail, while firms characterized as efficient by the flow approach are generally more likely to fail. Further, we test output definitions and find the theoretical concern regarding the production approach's use of losses as a measure of output is not validated empirically.