Value is a relative term often specific to a given asset. For example, if the price of gold declines from $1,800 an ounce to $1,250 an ounce, as it has, then gold is less valuable. The price of property/casualty insurance is materially set to decline over the next 10 years. In fact, one reason insurance companies have been so profitable over the last decade is that premiums increased materially faster than claims until last year. If premiums were even softer, matching claims, insurance would already be less valuable.
Here is proof: Claims frequency relative to net premiums written has decreased from .18 claims per $1,000 of NPW in 1998 to .10 in 2014 (last year for fully developed claims). That is a huge decrease. Absolute claims frequency is flat too. Approximately 53 million claims are filed annually plus or minus one million since 1998. This counts all claims. Consider how many millions more homes, cars, people and businesses have been created since 1998 and yet the number of claims is consistent. This means the number of claims per GDP dollar has decreased materially. Insurance is less valuable (and do not confuse value and price).
Until 2017, earned premiums were rising far more quickly than losses paid over the last ten years. The catastrophes in 2017 created a catch up.
Going forward, relative to GDP, less insurance will be required for many reasons including:
- Safer cars –
- Smart braking
- Mirrors with warnings to not change lanes
- Better airbags
- Backup cameras
- Driver facing cameras (which cause drivers, especially commercial drivers, to drive more safely)
- Not to mention driverless cars
- Safer property
- Water monitoring devices have the potential to decrease non-cat water property claims, which are the largest types of non-cat claims, to almost nothing.
- Security monitoring
- Gas monitoring
- Workers’ Compensation
- Some exciting new tools are just coming on the market that will materially decrease injuries to employees.
- Sharing Economy
- Sharing homes
- Sharing vehicles (less vehicles to insure)
- Automakers providing vehicles with insurance included
- Gig employees which decrease the workers’ compensation market
- Fewer blue collar jobs reduce workers’ compensation premiums
For certain, cyber will take up some slack but until producers learn enough about the coverage to correctly sell it and enough companies are willing to buy it (which will not happen until they understand the complex coverage more completely, which will not happen until producers understand it well enough to explain it, which may never occur), then in the best case scenarios, cyber is a small plug in a big hole. Insurance simply is and will become less valuable then, which also means less important.
The result will be considerable consolidation at the carrier level as that part of the industry begins catching up to the consolidation of insurance distributors. According to A.M. Best, approximately 900 P/C insurance companies exist. Ninety (90) write approximately 88 percent of all net premiums. The top 11 write approximately 50 percent of all net premiums. Excluding the niche small carriers, the remaining carriers outside the top 90 are fairly immaterial. Any given one of these small carriers’ written premium is a rounding error within the industry. In any given year, according to my 20 year study of the top 90 insurance companies’ growth rates, approximately 30 percent have negative growth and a handful of these top companies have negative growth two and three years consecutively. Industries in these situations consolidate, especially when the market is shrinking.
Insurance companies, at least the ones thinking strategically, are greatly concerned about what they are going to do as insurance becomes less valuable. Maybe they will diversify. When banks couldn’t figure out how to make money in banking, for some reason they thought they could make money in insurance. We’ve all seen the non-public debacles and the Wells Fargo fiasco. Making money in a different industry is extremely difficult (for reference, read Chris Zook’s trilogy of books beginning with “Profit from the Core”). Some will attempt to address the issue through acquisitions. Some will push cutting agency compensation further (some are already quietly studying the potential for this). Some will get into insurance distribution (dozens already are). Some might invent new products. Some will do some combination of all the above. They have to address the decreasing value of insurance some way and somehow.
Agencies have to address the same forces. If companies consolidate, they gain more power over agency compensation and expiration ownership. Combined with decreasing rates and the decreasing value of insurance, some form of related services such as risk management is a likely solution. Another option some distributors are choosing is to simply get better at the basics which includes actually knowing and selling the right coverages. So many agency personnel, staff and producers do not know their coverages that agency leaders who focus on simply executing on what agencies should already be executing may be able to make up the entire difference. Agencies with great leadership probably have an easier future than companies.
The times are definitely changing. No one in the industry has ever experienced what the future is about to behold which provides tremendous opportunities and challenges. Will you have the fortitude and leadership to guide your firm to a bright future?
Outspoken and highly-respected insurance consultant Chris Burand provides a complete and in-depth review and analysis of today’s P/C insurance industry in the 2018 edition of his annual State of the Insurance Industry Report: 2018 that includes his take on rate adequacy and underwriting discipline, balance sheets, reserves, consolidation, solvency, premium growth, excess and surplus markets, benefits, independent agencies and more. Burand’s full 2018 State of the Industry Report is available for purchase on Insurance Journal’s Research & Trends site.
Also, Burand recently hosted a one hour Academy of Insurance online webinar on the State of the P/C Insurance Industry. What’s happening in insurance today? He shared his thoughts on whether agents and carriers will be able to maintain the “status quo” into the foreseeable future. Also, what will happen to the agency business model as more customers and carriers use self-service apps? Burand’s webinar is now available on-demand from the Academy.
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