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

We find evidence for the capacity-constraint hypothesis in a newly constructed sample of firmlevel data for the German non-life insurance market over an extended period (1954–2016). Moreover, we show 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 decreased firm capacity has a negative impact on productivity change. The dual impact of capacity is important since price and productivity change determine firm profitability. Our results yield important implications for the understanding of underwriting cycles and reemphasize the role of capacity in the business of insurance.