To clearly identify what separates commercial insurance leaders from laggards, PwC has used our Insurance Performance Measurement (IPM) approach to analyze the market. After scrutinizing data covering 2014 to 2018, we conclude that a few key traits define the leaders compared to their competitors. What stands out in particular is that—contrary to established opinion—leading insurers select risks with the lowest volatility and price to maximize returns. This flies in the face of the long-accepted maxim “high risk, high reward,” but our research reveals that surprising fact.
Leading insurers select risks with the lowest volatility and price to maximize returns.
Greater underwriting profit at less risk
Strategic risk selection and pricing continues to distinguish the leaders from the rest. Financial theory posits that increased returns come at the cost of greater levels of correlated volatility (or “beta”). However, our results show the exact opposite: leading insurers earn economic returns by underwriting at lower levels of correlated volatility. In other words, leading insurers select the best risks (i.e., lowest volatility or correlation profile) and price to maximize returns. Our underwriting betas for leading insurers were 54%, compared to 68% for the pack and 129% for laggards.
Operationally driving profitable underwriting
Effective underwriting fuels insurers’ economic returns. Insurers with efficient portfolio management, risk appetite or sourcing and process capabilities have consistently lower loss ratios than their competitors. In fact, the average loss ratio of leading insurers is 47%, compared to 73% for laggards.
Moreover, leaders rely on their underwriting acumen to fuel performance and profitability, not their investment expertise. In fact, leaders actually have lower investment returns than other insurers, have lower yields than the P&C industry on average (including both pack and laggard cohorts) and are not seeing any significant improvements. Yields for the leaders have remained at just under 3% in our last two analyses, while both the pack and laggards have experienced (marginally) improved investment returns.
In addition, leaders do not rely on superior loss adjustment expense (LAE) capabilities to fuel performance. They actually have higher LAE ratios than the others, including those in the pack and the P&C industry on average (though this is impacted by business mix). LAE ratios for the leaders deteriorated this year compared to last and no longer differentiate the leaders from the rest.
Investment returns and loss adjustment expense capabilities do not fuel leading insurers’ economic returns.
Disciplined expense management
Although expense ratios have improved for the industry overall, the expense ratio gap has remained the same. This underscores the continued importance of disciplined expense management to support profitable underwriting. The leaders’ average expense ratio is 24%, compared to 32% for laggards.
Instead of focusing on one line of business, leading insurers generally have more diversified books of business. This allows them to more effectively navigate the underwriting cycle over time. In contrast, laggards tend to have less diverse portfolios. Over 60% of their books are concentrated on one line, compared to only 36% for leading insurers. With this in mind, it is unsurprising that insurers with national footprints and strategies tend to outperform those with regional strategies.
Leading insurers generally have more diversified books of business.
The path forward is clear. To outperform the industry in an increasingly challenging market, market leaders bring together the four imperatives listed above through tight governance and controls.
What typifies this governance and control? In leading companies, senior leadership manages the overall risk portfolio against clearly defined metrics that the company monitors and follows. In addition, strategic and tactical underwriting capabilities (e.g., product line or business unit governance) support senior leadership to out-select and out-price risk resulting in balanced and profitable portfolios. Although some lines, geographies or business classes may underperform in the short term, establishing the right form of governance from the start helps create portfolios that out-perform over time.
Establishing the right form of governance from the start will help create an overall portfolio that performs well over time.
In summary, effective governance helps market leaders to underwrite better business at less risk, manage operations and expenses more effectively and diversify where it makes economic sense. The leaders consistently synthesize and leverage internal and external forms of information to out-select or out-price the competition. They connect the dots across underwriting, claims, actuarial and finance to quickly identify and explain variations in underwriting activity (e.g., submissions, quotes, binds) and claims activity (e.g., frequency, severity) and control results accordingly.
Managing Director, PwC US
Principal, PwC Strategy&, PwC US
Global Growth Strategy, US Financial Services Practice, PwC US
Manager, PwC Strategy&, PwC US
Partner, PwC US
Actuarial Director, PwC, PwC US