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.
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.
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.
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.
