Insurance Companies Risk-Adjusted Efficiency Using a Composite Risk Management Index

Abstract

Purpose – This study investigates the relationship between risk management practices and operational efficiency in insurance companies using risk-adjusted efficiency data from a sample of 744 insurers from 2012 to 2021. This study aims to determine how specific risk management practices impact operating efficiency. Design/methodology/approach – A Data Envelopment Analysis “Benefit-of-the-Doubt” model is used to construct a risk management index (RMI) composed of five sub-indicators: capital adequacy, asset quality, management efficiency, earnings and solvency. This proposed RMI assesses the relationship between insurers’ risk management practices and operational efficiency. Findings – The findings indicate a positive and statistically significant relationship between RMI solvency and operational efficiency. In contrast, the other RMI components demonstrate a significant but negative relationship with operational efficiency, implying that the composite RMI is an effective tool for ranking and comparing the quality of insurers’ risk management practices. Originality/value – To the best of the authors’ knowledge, this study is among the first to develop an RMI for estimating risk-adjusted efficiency for insurance companies. By using RMI as a performance measure instead of conventional profitability ratios, this methodology underscores critical areas for the improvement of risk management practices, including capital adequacy and solvency.