The Productivity of European Life Insurers: Best-Practice Adoption vs. Innovation

The aim of this work is to investigate the drivers of productivity evolution in the European life insurance industry in the aftermath of the enforcement of the Third Directive. We apply Data Envelopment Analysis (DEA) to a panel of 602 life insurance companies operating in five European countries (Germany, France, Italy, Spain and the U.K.) between 1997 and 2004 and develop a generalized Malmquist efficiency decomposition to gauge the relative importance of two sources of productivity change: the improvement of best-practices via innovation, and the adoption of practices currently adopted by local or foreign best-in-class insurers. We find that productivity increased on an annual basis by 6.71 per cent; the increase has been mostly due to innovation in best-practices (6.67 per cent), while best-practice adoption contributed by a mere 0.04 per cent. Our findings also indicate that, over the period of our analysis, innovation of best-practices was attributable to technological change. We find no evidence, instead, that productivity has been driven by a shift in the risk profile of insurers.