The Impact of Capacity on Price and Productivity Change in Insurance Markets: New Firm-Level Evidence

As reflected in annual assessments produced each year by many business consultants, underwriting cycles in insurance remain a critical factor in insurance firm performance and consumer surplus. In spite of this, to date neither the academic nor the business literature has reached a definitive conclusion on the causes of underwriting cycles. In this study, we find evidence for the capacity-constraint hypothesis in a newly constructed sample of firm-level data for the German non-life insurance market over an extended period (1954–2016). Moreover, we show empirically that the impact of capacity on price is complex and depends on various exogenous factors (interest rate change, catastrophes, GDP growth, and regulation). We also find that firm capacity has a negative impact on productivity change. The dual impact of capacity is important since both price and productivity change determine firm profitability. Our results yield important implications for the understanding of underwriting cycles and re-emphasize the role of capacity in the business of insurance.