Conning Co.: Property/Casualty Industry Must

July 18, 2000

Insurers in the property/casualty sector will not be able to reduce expense levels significantly unless they address their commission and other acquisition expenses, according to a recent Conning & Company study.

Insurers have been unable to reduce their underwriting expense ratios and, in fact, have seen these ratios rise in the last few years, largely because competitive pressures have helped to keep expenses high. In order to compete effectively in what promises to be a more fragmented marketplace, insurers will have to develop multiple distribution channels, with varying expense structures, which will allow them to reach potential customers through a number of access points.

The Conning study, “Property – Casualty Expense Management: Chipping at the Wrong Block in a Fragmenting Market,” reports that personal lines expense ratios as a percentage of direct premium rose 7.9% from 1994 to 1998, and that expense ratios for the primary commercial lines jumped 9.7% over the same period. Insurers failed to control expenses because none of their strategies focused on reducing commissions and other acquisition expenses, expenses which combined represent roughly 70% of the industry’s total underwriting expenses.

“Because the bulk of insurers’ underwriting expenses were considered sacrosanct, much of their effort to control expense ratios was marginal, and ultimately doomed to failure,” said Jack Gohsler, Senior Vice President at Conning & Company. “Insurers have only recently begun to re-examine their direct sales costs because they have been afraid of disrupting their primary, or in some cases, only distribution channel.”

Technological change is expected to continue to drive the fragmentation of the insurance marketplace, and this fact will become the defining marketing imperative of the next decade. The near monopoly currently enjoyed by the agency business model is giving way to a new marketing landscape built around multiple market access points and an array of sales structures – many of them Internet based.

Existing agency distribution and service models will continue to be a dominant force in the property – casualty insurance marketplace for the foreseeable future. But to respond to the expense pressures resulting from the fragmentation of the marketplace, agency companies should perform a cost/benefit analysis of every distribution channel.

For instance, insurers should accurately gauge the size of the market that will prefer a self – service model via the Internet, and then develop a model with a cost structure that can exploit this market segment.

“Expense control will remain a critical issue, and we believe historical approaches that focus on expense control incrementally or independent of business strategies will become counterproductive,” said Gohsler. “Expense control must be addressed from within the constraints of each operating model. The new competitive landscape leaves little margin for error.”

In the fragmented techno – marketplace, focus will become much more important than scale. As market niches proliferate exponentially, the size of these markets will become increasingly smaller and insurers will need to do more with less. Companies that can serve multiple niches, particularly in personal lines, are expected to thrive.

The Conning study, “Property – Casualty Expense Management: Chipping at the Wrong Block in a Fragmenting Market,” is available from Conning & Company for $575 by calling toll free (888) 707-1177 or (860) 520-1245 or can be purchased through the company’s web site at www.conning.com. A complete listing of all Conning Strategic Studies can also be found by visiting the site.

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