Optimal labor and capital utilization by financial firms: evidence from the German property and casualty insurance industry

Abstract

Motivated by discussions whether financial firms use too much equity capital and labor, we analyze the input utilization in the German property and casualty (p/c) insurance industry in a newly constructed sample of firm-level data in the period 1956–2019. An earlier study for the U.S. (Cummins and Nini, J Financial Serv Res 21(1–2):15–53, 2002) finds that p/c insurers over-utilize capital. Compared to this study, our large historical dataset exhibits less heterogeneity and thus allows a cleaner identification of the impact of firm characteristics on input factor utilization. We show that German p/c insurers have substantial cost savings potential and that labor input is the main driver of inefficiency. We also document severe differences in firm characteristics driving the utilization of labor. Our results contribute to both the academic discussion on productivity and efficiency in financial services as well as to the political discussion on the future of work and capital regulation in this sector.