Brother, Can you Spare A Dime?
By Geoff Smith, Guest Contributor
Quoting the song title from the best-known song of the great depression may be an inappropriate way to describe the current expense ratio levels of property/casualty commercial lines insurers. But there is no disputing the upward trend of those expense ratios. With the current state of the economy contributing to a continuation of slower premium growth, commercial insurers’ expense ratios for 2010 will in all probability increase again. Towers Perrin’s most recent commercial lines insurance pricing and profitability trends survey (CLIPS) showed commercial insurance prices dropped only 1% during the first quarter of 2009, compared to the same quarter in 2008. The nearly flat overall price level provides evidence that the soft market is bottoming out, and represents the smallest price decrease reported by CLIPS in the last four years. Perhaps this pricing trend will continue in 2010 and lead to a gradual, general firming of prices. However, with all the negative impacts on expense ratios, this will in all likelihood not be enough to offset the upward expense ratio movement.
So, what are the alternatives if a P/C commercial lines insurer is to mitigate expense ratio pressures? It’s been my experience that it is less challenging to fix underwriting issues than expense issues. Fixed expenses coming from infrastructure take long timeframes to reduce or shed. Variable expenses related to staff size (with salaries as the largest component) can be reduced through attrition and layoffs, but requires a balancing act to avoid upsetting or losing good customers; agents and insureds. Then, when a hard market comes or when economic conditions improve, gearing up to handle more business opportunities take time – time more wisely spent taking advantage of increased available productivity, if you make the right strategic decisions.
There is no dispute that the sector now has more, and better, tools to allow faster adjustments to price, underwriting and changing market conditions than it had during previous times of slow premium growth. However, I’m convinced many carriers that have not made the strategic technology investments that yield a lower cost structure, higher productivity and support some elasticity when times get tough and profitable premium growth is harder to come by.
How does a carrier build its business – in a smart way? Maintaining the same or improved underwriting quality, but handling more customer volume and growing its book of business with the same resources, resulting in a lower expense ratio? I’m sure many have tried a number of varied strategies to achieve these desirable outcomes, but history shows not many have succeeded.
One strategy that is emerging as a winner, and a draw for early adopters, is to invest in a powerful commercial-lines underwriting management system that encompasses a highly automated underwriting, referral and quoting process and is easily configured.
If more P/C commercial insurers implement such a strategy, fueled by an underwriting management system, then perhaps instead of singing “Brother, Can You Spare a Dime?” they will be singing “Happy Days Are Here Again!”