Measuring Managerial Ability in the Insurance Industry

This paper introduces the managerial ability measure for the property–casualty insurance industry using Data Envelop Analysis (DEA). We extend the managerial ability measure introduced in Demerjian et al. (2012) to the insurance industry by adapting it to the industry-specific production function. In particular, we measure managerial ability as managers’ success in generating insurance premiums. We find that this measure is strongly associated with managerfixed effects and is positively associated with return on assets (ROA). Also, replacing low-ability CEOs with high-ability CEOs leads to an increase in ROA. We further investigate the type of firms with high managerial ability. We find that CEOs who manage more affiliated insurers have higher managerial ability. We also find that firms managing more risks require higher managerial ability. Specifically, firms ceding more insurance policies to reinsurers have less capable managers, while firms assuming more insurance policies from other insurers have more capable managers.