Productivity in financial and insurance services

Staff research note

This note by Jenny Gordon, Shiji Zhao, Paula Barnes, Marcelo Munoz and James Hunter was released on 18 February 2016.

It continues the Commission's work of examining industry productivity statistics to better understand what they mean.

As the first service sector to be examined, there are new questions as to what is actually being measured and how well it reflects the underlying concept of productivity.

The views expressed in this research note are those of the staff involved and do not necessarily reflect the views of the Productivity Commission.

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Key points

The Finance insurance and superannuation (FIS) services industry has historically experienced strong measured productivity growth, averaging 2.2 per cent a year compared with 0.8 per cent for the market sector over the period 1989-90 to 2012-13.
The main driver of FIS Multifactor Productivity (MFP) growth was output growth, which grew at 4.6 per cent over the period, while labour input growth averaged 0.6 per cent and capital 3.9 per cent per year.
Over the shorter period 1994-95 to 2011-12, MFP growth in FIS averaged 1.9 per cent per year. But this masks considerable differences in the growth rates of the sub-divisions:
- MFP growth in Finance averaged 0.6 per cent per year compared with 2.0 per cent per year for Insurance, superannuation and auxiliary services (ISA).
The average growth rates also mask considerable volatility:
- MFP growth in Finance has been cyclical (following the business cycle). Over the period 1998-99 to 2007-08 MFP declined by an annual average of 1.0 per cent, but grew by an average of 0.9 per cent a year from 2007-08 to 2011-12
- MFP growth in ISA grew at an annual rate of 7.2 per cent over 1989-90 to 2007-08, then fell by an annual rate of 7.4 per cent over the current cycle 2007-08 to 2011-12.
Production (gross output) is usually measured by sales of goods and services (and changes in inventories). But in FIS, many outputs have to be imputed:
- Financial Intermediation Services Indirectly Measured (FISIM) is based on the interest margin. In 2011-12, it contributed around 77 per cent to gross output in Finance, reflecting a substantial increase in share since 2007-08.
- The Insurance services charge, measured as premiums plus premium supplements less claims, was around 95 per cent of total Insurance output in 2011-12. Non-life insurance accounted for 71 per cent (50 percentage points general insurance and 21 percentage points health insurance) while life insurance accounted for 29 per cent of the insurance service charge in 2011-12.
- Imputed income (administrative and investment costs) forms the majority of gross output for Superannuation, contributing 98 per cent in 2011-12.
Auxiliary services, which accounted for 20 per cent of FIS production in 2011-12, is the only subdivision which directly measures output on the basis of fees and charges.
Intermediate inputs made up 37 per cent of the value of FIS production in 2011-12, a decline from 44 per cent in 1994-95. Reliance on intermediate inputs is highest for Insurance and superannuation (66 per cent of production), and lowest for the Finance subdivision (25 per cent).
The imputed nature of gross output poses challenges for the interpretation of productivity statistics. Lack of capital data at sub-division level also restricts the scope of analysis. Further work is required to understand the real underlying productivity of the industries that make up the FIS sector.

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