The persistent combination of soft pricing, weak investment returns and marginal premium growth have left P&C insurers in an unenviable position.
With the underlying economy likely to remain weak and organic growth hard to come by, the most effective lever for financial success remaining for insurers is to control costs.
A new report from
Alarmingly, the report identified an industry trend is toward higher expense ratios. “Our findings are that the industry generally has increased underwriting and claims costs relative to premiums,” the report states. “Investments in operating capabilities, technology, and intellectual capital increased overall costs for insurers. In the low-growth environment of the past three years, these drove expense ratios to a 40-year high as of 2010 and likely a higher ratio in 2011. The largest increases were in salaries and related employee expenses, followed by advertising, legal and audit, and equipment and EDP.”
Moreover, the report found that loss ratios are the critical drivers of consistent superior underwriting performance, noting that even in personal automobile, only two of the superior-performing insurers had loss ratios higher than the industry.
Yet, the report warns against viewing expenses associated with underwriting and claim management without including the impact on losses and loss ratios could lead to inadequate loss controls. Indeed, the insurers need to invest in core capabilities now to ready for growth when the economy and market turn. The report also recommends new metrics that take these investments into account and afford a holistic view of expense and loss results. “One of the reasons to use data besides premiums to evaluate effectiveness of underwriting and claims investment is to neutralize the impact of premium rate changes on these expense ratios,” the report states.
