Personal lines automobile insurers can maximize their revenues by understanding their distribution channels and developing strategies to optimize success, according to a consulting firm’s report.

Hartford, Conn.-based Conning Research & Consulting’s report, “The Economics of Personal Auto Distribution, Competing in a Softening Market 2007,” reviews the history and economics of the personal lines automobile insurance market and discusses strategies to deal with the soft market.

The report notes that independent agent and direct distribution models have kept a pretty constant share of the market at 35- and 65 percent respectively. It warns, however, that advances in Internet sales could change this “and lead to further erosion of the independent agency channel.”

On cost structure, there are several insurers who pursue low cost strategies in their distribution. The most prominent the report names are GEICO, AIG Direct and 21st Century. These direct writers make up only 25 percent of the top 100 personal automobile writers but represent 50 percent of the 15 lowest expense ratio auto writers, the report says.

But the numbers, Conning notes, do not give the entire picture. While there are expense advantages, the report notes that the independent agent system has a lower overall underwriting expense ratio, the balance of which is in commission. Direct writers pay high-salaried sales staff and advertising expenses, whereas the agency system does not.

According to the report for top 200 insurers, expense ratio average is 27.4 percent. The independent agent ratio is the highest at 28.4 percent, followed by exclusive agency writers at 23 percent and direct writers at 22.8 percent.

Conning, however, says there are hurdles to finding a “suitable measure of operational efficiency.” Aspects such as inflation, medical costs, added physical damage coverage, geographic location, number of vehicles on a policy and other factors can obscure efficiency measures.

Growth in a soft market can be difficult, with a leg up to the independent agent system because it has lower costs in acquiring new business. By understanding the value in each of their distribution models, insurers can help agents understand more clearly the tools they should be using for growth.

“As companies adjust strategy to optimize their business for the changing phases of the cycle, understanding the economics of the distribution channels will be critical factor for success,” the report said.

Copies of the report are available for purchase at