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Assessing the Efficiency of an Insurance Provider—A Measurement Error Approach

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  • Mario Jametti
  • Thomas Ungern-Sternberg
Abstract
The purpose of this paper is to compare the cost efficiency of private and public property insurance providers in Switzerland. The most commonly used measure for this kind of exercise is the claims-premium ratio. We argue that this measure may give strongly biased results. We develop a simple model to test whether the elasticity of premiums with respect to claims is less than unity. We address the fact that premium income is relatively stable across time, while claims are not, using estimation techniques that correct for measurement error. We develop tools to cope with heteroskedasticity in such measurement errors and apply the model to a data set on 19 firms in housing insurance markets in Switzerland. We show that the public insurance providers are about 20% more cost efficient than their private counterparts. Copyright The Geneva Association 2005

Suggested Citation

  • Mario Jametti & Thomas Ungern-Sternberg, 2005. "Assessing the Efficiency of an Insurance Provider—A Measurement Error Approach," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 15-34, June.
    • Handle: RePEc:kap:geneva:v:30:y:2005:i:1:p:15-34
    DOI: 10.1007/s10836-005-1105-4
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    1. Thomas VON UNGERN-STERNBERG, 1994. "Die kantonalen Gebäudeversicherungen. Eine ökonomische Analyse," Cahiers de Recherches Economiques du Département d'économie 9405, Université de Lausanne, Faculté des HEC, Département d’économie.
    2. Meijer, Erik & Wansbeek, Tom, 2000. "Measurement error in a single regressor," Economics Letters, Elsevier, vol. 69(3), pages 277-284, December.
    3. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
    4. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    5. Epple, Karl & Schafer, Reinhard, 1996. "The transition from monopoly to competition: The case of housing insurance in Baden-Wurttemberg," European Economic Review, Elsevier, vol. 40(3-5), pages 1123-1131, April.
    6. Ramses H. ABUL NAGA, 2000. "Galtonian Regression of Intergenerational Income Linkages : Biased Procedures, a New Estimator and Mean-Square Error Comparisons," Cahiers de Recherches Economiques du Département d'économie 00.13, Université de Lausanne, Faculté des HEC, Département d’économie.
    7. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    8. Felder, Stefan, 1996. "Fire insurance in Germany: A comparison of price-performance between state monopolies and competitive regions," European Economic Review, Elsevier, vol. 40(3-5), pages 1133-1141, April.
    9. von Ungern-Sternberg, Thomas, 2004. "Efficient Monopolies: The Limits of Competition in the European Property Insurance Market," OUP Catalogue, Oxford University Press, number 9780199268818.
    10. Thomas VON UNGERN-STERNBERG, 1995. "Kritische Überlegungen zu dem Gutachten von Professor Schips über die kantonalen Gebäudeversicherungsmonopole," Cahiers de Recherches Economiques du Département d'économie 9502, Université de Lausanne, Faculté des HEC, Département d’économie.
    11. repec:dgr:rugsom:00f14 is not listed on IDEAS
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    Cited by:

    1. Hofmann, Annette, 2005. "Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks," Working Papers on Risk and Insurance 16, University of Hamburg, Institute for Risk and Insurance.
    2. Mario Jametti & Thomas von Ungern-Sternberg, 2009. "Hurricane Insurance in Florida," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0905, USI Università della Svizzera italiana.
    3. Annette Hofmann, 2007. "Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 91-111, June.
    4. Ana María Reyna & Hugo J. Fuentes, 2018. "A cost efficiency analysis of the insurance industry in Mexico," Journal of Productivity Analysis, Springer, vol. 49(1), pages 49-64, February.

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    More about this item

    Keywords

    insurance; public and private; cost efficiency; C/P ratio; measurement error; CALS;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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