Study Says Insurers Lack Efficiency

The average efficiency ratios for p-c insurers has remained at roughly 38 percent from 1982 through 2002, while the banking ratio fell from 69.1 percent to 57 percent during that same period.

"The initial premise of the study is that the property-casualty insurance industry has underperformed other industries financially for yearswith a lower return on equity, lower price-to-earning ratio and greater volatility," said Bruce Hale, a Conning research analyst and author of the report.

"All three of those things," said Mr. Hale, "are less desirable in the eyes of investors and senior executives at insurance companies."

The question that carriers face is, "How might the insurance industry boost its return on equity?" he said. "From there, we did an analysis that expenses are fertile ground to do that."

Conning used nontraditional items to examine expense performance, said Mr. Hale. The accepted comparison is expenses to written premium, he said.

Conning also examined expense performance trends over a long term.

Giving an example of the analysis of nontraditional measures, Mr. Hale explained Connings analysis for personal auto. The study looked at expenses divided by the number of households that own at least one vehicle.

When adding together commission expense with acquisition expense, plus general expenses, and factoring out inflation, overall expenses for insurers actually have risen more than 44 percent for personal auto. In hard dollars, the average expense rose from $118 per household in 1982 to $167 in 2002.

"From that standpoint, you can say that there has been an overall deterioration in that nontraditional expense ratio despite all the advances in automation, and despite the economies from there being a lot more households and vehicles," he observed.

The report examines five insurance lines in detail: personal automobile, homeowners, commercial multi-peril, commercial automobile, and workers compensation.

While not commenting directly on the report, Joseph Annotti, vice president for public affairs for Des Plaines, Ill.-based Property Casualty Insurers Association of America, said that insurers are working to improve their efficiency.

"A competitive market demands efficiency, and insurers are constantly seeking ways to reduce their expense ratios and increase customer satisfaction," said Mr. Annotti.

He said the biggest obstacle to driving down such costs "is a burdensome and inefficient regulatory system that in many states forces insurers to go through a complex and expensive process every time they want to adjust a rate or form.

"The current regulatory system must be overhauled so that markets are driven by competition, not bureaucratic red tape. Such regulatory reforms would dramatically reduce insurer expenses, provide consumers a greater choice of companies and products, and spur price competition."

In addition to analyzing long-term expense performance trends, the Conning study also details how executives can perform their own analysis and improve their efficiency ratios. (See related table.)

Mr. Hale further recommended that the analysis should include all key senior executives in the company.

The 163-page study is available for sale from Conning Research & Consulting Inc. For information, visit Connings Web site at www.conningresearch.com.

Reproduced from National Underwriter Edition, July 1, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.