Navigating the highly competitive property and casualty personal insurance market
Premium growth in the global property and casualty personal insurance market, which has historically been 3%, has increased significantly to more than 15% in the past two years. Despite premium growth, most insurance companies’ expense ratios remain in the high-cost range of 20% to 30%.
The need for operational efficiency has never been greater. Significant transformation is required to achieve a more competitive expense ratio range of 12% to 15%, which is achieved by a handful of digital attackers and fewer incumbents.
In this article, I explore why expense ratios are rising, how to shift the cost curve, and the value it delivers through profitability, enhanced customer experience, and increased market share.
Industry dynamics and strategic shifts
The consumer insurance landscape is undergoing profound changes. Traditionally, automotive and household products have been subsidized by more profitable product lines, but by 2024, this is changing due to the following trends:
- Divestitures and shareholder pressure: Commercial insurers are divesting non-strategic personal lines in Europe and North America. Meanwhile, personal lines insurers are also focusing more on growing through intermediary partnerships or strengthening direct-to-consumer channels. Additionally, shareholders are increasingly putting pressure on insurance companies to improve shareholder returns.
- Operable Brick Wall: The insurance industry has begun to use more obvious cost-saving measures such as tactical personnel optimization, tactical real estate optimization, and tactical IT optimization, which shows that the low-hanging fruit of cost reduction has been exhausted. Furthermore, while affinity and partnership business models such as bancassurance are growing rapidly globally, their growth opportunities are limited for insurers whose expense ratios remain around 20%.
- Changing market conditions: The rise of autonomous and electric vehicles requires a re-evaluation of traditional claims adjustment methods. Additionally, the shift in consumer behavior towards a “pick and mix” approach is also evident in the evolution of home insurance product structures, which are transitioning from bundled options to more customizable insurance options.
Key variables affecting expense ratio
Three key factors affect insurance company expense ratios:
- Claim Adjustment Method: The choice between a wholly owned, managed or outsourced repair network can significantly impact costs. Each option has different benefits and challenges that impact the overall expense ratio.
- customer behavior: Digital adoption is quickly becoming a cornerstone of modern insurance, but the situation can vary significantly from country to country. Insurers must adapt to this trend by providing digital interfaces that meet customer expectations for simplicity and speed.
- Distribution channel: The distribution method also plays a crucial role. Direct selling, partnerships with banks (bancassurance) and digital platforms can provide cost-effective ways to reach customers.
The rewards of operational excellence
Over the next few years, insurance companies have the opportunity to gain a significant portion of the market share. $170b in premiums at risk as customers switch carriers. However, for those businesses that wish to remain competitive, seize this growth opportunity and remain viable into the future, achieving an expense ratio below 20% is critical.
In my experience, operational excellence in personal lines insurance is:
- customer loyalty: Increase customer retention from an average of 1.5 years to over 4 years in best-in-class scenarios.
- Claims handling efficiency: Reduces key-to-key motor repair time from 25 – 45 days to 8 – 12 days and home repair time from 237 days to 60 days.
- expense ratio: Reduce this key metric from the industry average of 20 – 30% to an optimal 12 – 15%.
Building blocks for low-cost architecture
Achieving low expense ratios is not an accident, but the result of thoughtful strategic choices and investments:
- Overhaul legacy systems: On-premises deployment remains the most common deployment option for all core systems in the insurance industry (Celent 2023). As times and the technology landscape continue to change, these legacy systems are often difficult, if not impossible, to upgrade, slow, and often come with custom bulky bolt-ons for extra functionality. Not only does this have a negative impact on the customer experience (e.g. it takes longer to implement a simple customer query such as an address change across all platforms), but it also has a negative impact on employee onboarding as employees have to learn a host of different systems and non-standardized manual processes. It is critical to move beyond mere front-end digitization and embrace digital transformation.
- Streamline workforce: Underwriters spend 40% of their time on non-core activitiesrepresenting tens of billions of dollars in efficiency losses every year. If these tasks can be automated or enhanced, this could not only reduce costs but also increase agility and responsiveness.
strategic choices and leadership
Becoming a personal lines insurer in the low expense ratio range must be a strategic choice as it will redefine the company’s DNA. It cannot be achieved simply by re-platforming, deploying engagement systems on top of legacy technology, or by outsourcing. Here are 4 strategic ways to shift your cost curve:
- organizational change
Organizational transformation focuses on combining the right jobs with the right resources to create a more efficient and effective workforce. The strategic direction must be clear, clarify who the insurance company wants to be, and strengthen its focus on core customer groups and core products. An insurance company with an expense ratio of 12% to 15% cannot afford to spend its time and energy on anything other than its chosen core business. - Spend Optimization
Insurers require granular understanding and oversight of spending with third parties. Eliminating a third or half of your cost base is a huge move, and if it were easy, everyone would be doing it. Due to the nature of such dramatic cost reductions, it’s worth pointing out that it’s unlikely that most of the insurance company’s leadership has done this before. Becoming a unified leadership team, with one voice and one direction, is difficult; it requires visionary leadership, but that leadership must be rooted in fact-based decision-making. - technological modernization
Insurers need to focus on IT rationalization and modernization to enable new capabilities and reduce technical debt. Deciding to replatform a plan or decide to engage in a tier system is difficult. Trying to take employees on a journey of company change, system change, and reskilling is difficult. The answer lies in understanding the problem deeply before trying to find the right solution: what is driving workload and cost, and the best ways to eliminate them. Every leadership team should keep Gen AI in mind. Insurers with a strong digital core can move quickly, but most are making the investments needed to implement AI and next-generation AI at scale. According to Accenture Pulse of Change Study46% of insurance executives say it will take more than six months to scale generative AI technology and take advantage of its potential benefits. If applications and data are not in the cloud, and there are no strong security layers in place, it will be nearly impossible to benefit from Gen AI at scale. - Strategic Management Services (BPS)
This is where it all comes together – a customer service agent needs to push a button to update a customer’s address change across five products, and have this change reflected in the customer’s portal in real time. By orchestrating customer journeys and internal processes across the middle and back offices, and leveraging smart solutions, insurers can ultimately achieve optimal productivity and best-in-class customer responsiveness.
In summary, the process of achieving a 12-15% expense ratio is both challenging and necessary. Insurers must embrace technological advancements, optimize operations, and make strategic choices that align with long-term profitability and sustainability. The future of the industry will belong to those who can effectively adapt to these changing dynamics, ensuring that they not only survive but thrive in the competitive landscape of the future.
