Under Pressure – How the Environment Affects Productivity and Efficiency of European Life Insurance Companies

Deregulation and widespread economic changes have fundamentally affected the business conditions of European life insurance companies over the last decades. In this paper, we apply multi-stage Data Envelopment Analysis to identify the impact of the changing environment on productivity and efficiency. Considering a sample of 960 life insurance companies from 14 European countries we show that interest rates, equity market performance and inflation are three important environmental drivers of efficiency. We also document that some companies are over-utilizing equity capital, resulting in significant efficiency losses. Our results reveal a productivity decline, but an efficiency increase in the period 2002-2013; both trends can be explained by more challenging business conditions.