With various indicators suggesting that property/casualty insurers cannot rely solely on higher rates and organic growth to beef up their bottom lines, industry executives are planning several initiatives to strengthen their companies’ underwriting profitability. According to a Nolan Co. study, insurance executives are increasingly turning to analytics, implementing new policy-management systems and looking for improved staff expertise to boost their underwriting rigor.
Those initiatives, among others, also support many additional underwriting goals. After profitability, chief among those objectives are renewal retention, organic growth and expense ratio improvement, according to the study’s findings.
Underwriting profitability tops executives’ priority lists because of the various pressures working against it. Although executives anticipate that property/casualty insurance market conditions will continue to improve, they are not satisfied with projected profitability gains.
On the plus side for insurers, Moody’s predicts that insurance pricing, as well as the economy, will continue to strengthen and that retention levels will be stable. Many survey respondents agree that the insurance market will harden somewhat, as 82 percent plan rate increases.
However, the pressure on profitability still will be significant. Among those executives who expect to realize premium growth, 81 percent predict growth of less than 10 percent. In addition, despite the planned rate hikes, 55 percent of the respondents anticipate that market conditions will remain flat. The challenge for insurers in a hardening rate environment is maintaining competitiveness. Insurers will have to focus sharply on balancing rate increases against the potential loss of customers to nimble competitors offering lower pricing.
Also significant is Moody’s prediction of minimal changes in loss costs trends, accident-year loss ratios and underwriting margins, excluding catastrophes. If these predictions are valid, planned rate hikes may not be sufficient to cover claim costs even in an otherwise positive environment.
Meanwhile, reserve releases have declined from the levels that were important contributions to insurers’ earnings in prior years. In addition, with interest rates remaining low, insurers can expect only minimal investment yields.
The most optimistic segment of survey respondents are executives with insurers that generate less than $500 million of premium annually: 57 percent of that group has a positive market outlook. Executives at mutual companies are more optimistic than those at stock companies; nearly half of mutual company executives are optimistic, compared to 30 percent of the respondents at stock companies. Stock company executives, however, indicated they are more willing to increase their risk appetites.
Top Underwriting Initiatives
To meet their underwriting goals, a majority of the survey respondents are turning to analytics. More than 78 percent of the respondents reported that investing in analytics is a high priority — eclipsing the second-highest priority of implementing a new policy management system, which 60 percent of the respondents plan. Executives’ focus on analytics is no surprise. Companies in the vanguard of analytics usage have clearly demonstrated the market value of using advanced analytics to drive profitable underwriting and risk selection.
Increasing or improving staff expertise ranks as executives’ third-highest underwriting priority, with more than 50 percent focusing on this effort. New methods and tools are evolving the decision-making process, and risk profiles continue to change. Profitability rests with the quality of risk assessment thus keeping key decision-making resources up to speed should be a key priority.
Among other underwriting initiatives, social media programs and usage-based insurance pricing (UBI) are being implemented at 38 percent and 23 percent, respectively, of the survey respondents’ companies. Social media, which is exploding in the market, has yet to prove its true value on for underwriting as well as other functional departments. The popularity of UBI pricing is trending upward, with more impact on personal lines than with commercial lines companies.
Larger insurers are pursuing both of those initiatives more aggressively than smaller companies. Both initiatives require relatively significant investments, giving larger companies an advantage over their smaller counterparts in taking on these efforts.
One-third of the respondents also are planning a consolidation of underwriting operations or some other restructuring effort. This dovetails with the results from an expected increase in insurer mergers and acquisitions, which will result in consumers splitting their business among fewer insurers.
Property/casualty insurers face profitability pressures that rate hikes alone likely will not relieve, so insurance executives plan to improve margins through more rigorous underwriting. To meet that top underwriting objective — and several others — company leaders are relying more on analytics, investing in new policy management systems and improving staff expertise. In addition, larger insurers are implementing social media programs and UBI pricing. In addition to these initiatives, some executives are consolidating or restructuring their underwriting functions to gain operational efficiencies.
Eugene Reagan is a principal consultant at The Nolan Company, a management consulting firm specializing in the insurance industry.
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