Abstract
This study investigated cost inefficiencies and its relationship with value drivers of insurers in United Arab Emirates (UAE). The study revealed that there were 21β33% cost inefficiencies in these insurers under different model specifications of stochastic frontier and DEA; value drivers such as lower leverage risk, lower capital risk significantly improved cost efficiencies consistent with Basel II norms; ROE positively influenced cost efficiencies with further trade off between increased profit margin, decreased asset utilization and/or reduced equity multiplier by the insurer managements to achieve a targetβROE; and the trend of cost efficiency was improving during 2000β2004. The study suggests that stock insurers could overcome their cost inefficiencies through adoption of efficient measures such as risk mapping of clients, risk prioritization besides ALM techniques. The study has direct implications for individual and institutional investors in making their portfolio investment decisions in insurance sector, policymakers, and regulators to closely monitor inefficient insurers consistent with Basel II norms. Copyright Β© 2008 John Wiley & Sons, Ltd.