Shuji Yao, Zhongwei Han and Dan Luo
SELECTION OF OUTPUT AND INPUT VARIABLES The selection of output and input variables is critical in carrying out efficiency assessment. The results and interpretation are heavily dependent upon the choice of variables. Appropriate variables should be chosen based on the context of assessment. The possible output and input sets in the previous efficiency studies of insurance companies have been thoroughly discussed in Chapter 3. The selection of input variables is relatively easier than the selection of output variables. The existing literature categorises insurance outputs into two dimensions, income versus additions to reserves plus benefits. Some researchers also include claim payments in the second category. The first output group focuses on assessment of income generation abilities, while the second aims to evaluate the insurer’s capability of providing risk sharing and risk bearing (RSRB) services. Income maximisation and RSRB services maximisation are different goals for an insurance company but they are heavily interrelated. By common sense, to generate more income insurers must provide more risk sharing and risk bearing services. Therefore, measuring one of them is in fact measuring the other. Moreover, it is arguable that some insurance firms may have advanced risk management skills and experience. They can minimise the resources used by providing RSRB services and be efficient in generating income at the same time. The contribution of the risk sharing and risk bearing function to the society is a unique concern of the insurance industry when output variables are defined. It seems clear that the risk sharing and risk...
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