- An overview on the industry
- Increasing loss ratio and declining insurance margin
- New lines of insurance and flexible coverage terms
The US Property and Casualty (P&C) insurance industry has been witnessing a decline in the YoY revenue growth from 2013. The industry registered a YoY revenue growth of 2.7% (2016) as compared to 4% (2015).
This decline in the growth was directly attributed to the fall in Direct Written Premiums (DWP) and net investments income in the industry. The factors that contributed to the downward spiral were competitive insurance market, consolidation and increased catastrophe losses. The deterioration in the financial condition of issuers of portfolio securities or an insurer guaranteeing an issuer's payments of such investments also lead to the downfall of interest rates, this resulted in the lower net investment income.
In addition, different segments of property and casualty insurance are facing distinct issues. For instance, auto insurance industry encountered a sharp rise in both the frequency and severity of claims. In the last few years, an increase in the number of accidents led to a double-digit percentage rise in the aggregate cost of accidents. The home insurance market is still struggling to reach the pre-2008 crisis levels. On the other hand, there are new segments that have gained more importance recently. The cyber risk security insurance is one such segment that witnessed a tremendous activity. In fact, a slump in few of the traditional sectors was offset by these upcoming segments in the insurance market.
The Travelers Companies, Inc. (Travelers), The Allstate Corporation (Allstate) and Chubb Limited (Chubb) are the three leading P&C companies in the US that contributed ~15% of the total DWP. These also registered a stagnant growth in their revenues (2012–17).
Chubb registered an extraordinary growth in the revenue due to the acquisition of ACE Limited in mid-2016, this added $10.8 billion of premiums to its portfolio.
The stagnant growth was the result of a decline in the net premiums earned, low net investment income and other revenues. The gross and net written premiums were also negatively impacted by changes in the foreign currency exchange rates. Further, due to the slow-moving increase of revenues, the US insurers were unable to limit their losses and expense ratios. This was coupled with almost stable investment yields and resulted in low insurance margins for these insurers. Moreover, both the loss and expense ratio was on an upward trend for all the firms.
However, Allstate registered a minor dip in its expense ratio as can be seen in the charts. Additionally, the net investment yields declined for all the companies during the past 5 years. This increase in cost ratios was attributed to a high volume of insured exposures and catastrophe losses, increasing loss cost trends, high loss estimates in the personal automobile product line and low reserve development. Furthermore, none of the companies managed to achieve the industry’s average net investment yield of 3.6% in 2016. The main reason for the motionless movement of the net investment yield seems to be the low long-term reinvestment rates available in the market. Chubb, however, managed to maintain its yield close to the industry average primarily due to its recent acquisition as stated above. In 2017, the revenue growth was consistent across all the three companies.
Allstate, in order to control the costs associated with the increased auto accidents (2015) stepped up the prices of auto insurance policies and successfully improved auto profitability in 2016. But this had a negative impact on customer satisfaction and led to a 2.9% decline in auto insurance policies. In 2017, Travelers saw the lowest loss ratio and Chubb the highest owing to the higher non-catastrophic losses which will impact on its combined ratio and net investment yield.
The combined ratio is the highest for Chubb due to increasing loss ratio. The increased catastrophe losses and high claim severity are the primary reasons for the increased loss ratio. However, the company was able to manage the expense ratio by reducing the spending on its professional services, advertising, and compensation incentives. In 2016, Chubb had the lowest combined ratio amongst the three because of its acquisition, which resulted in higher DWP and lower expense ratios. The increase in Travelers’ combined ratio was mainly affected by high catastrophe losses, low underwriting margins and reserve development. In 2017, Allstate had the lowest combined ratio and Chubb the highest combined ratio in comparison to FY2016 (due to acquisition).
In 2016, Chubb had the lowest combined ratio and the highest investment yield which led to a high insurance margin. This can again be attributed to the recent acquisition. In 2017, despite the highest combined ratio which occurred due to the acquisition, Chubb managed the highest net investment yield but had a low net insurance margin. The net insurance margin for Chubb and Travelers reduced drastically (2017) due to a high combined ratio. Although this can be considered as a temporary effect.
The insurance margin is one of the most important criteria to assess a company’s profitability. The above chart shows the highest margin for Chubb followed by Travelers and Allstate. The key factors for a high insurance margin are the net investment yield and underwriting profit.
Significantly, losses and expenses are growing at a faster pace than revenue. This is forcing insurers to actively find newer solutions, particularly in the personal automobile and workers’ compensation lines of insurance. A rising frequency and severity of claims are beginning to erode the loss ratio performance.
There is a need to devise better underwriting strategies to contain the loss ratio. This was increasing up to FY2016 due to high claim expenses and catastrophe losses. The high loss ratios combined with low government bond yield are pressurising insurance and EBITDA margins. Insurers must maintain a certain level of surplus to underwrite risks. The industry should improve the top line by identifying and introducing new lines of insurance as the traditional avenues turn highly saturated and competitive while maintaining a price discipline. The companies should offer more flexible coverage terms to retain existing accounts and secure new policies. Likewise, the profitability of current policies can be enhanced if companies build a cost-effective digital communication, distribution and infrastructure solutions. Televisory believe that by increasing product prices, re-evaluating underwriting standards, controlling expenses and managing loss cost through a focus on claims processing, the US insurers can improve profitability in the near future.