P&C insurers playing catch-up on expense reduction: Conning

Compared to their peers, p&c insurers are not doing enough to reduce expenses, suggests a new report from Conning. While banks have managed at 20% expense reduction over the past 20 years, p&c insurers have seen expenses remain relatively stagnant. At the same time, banks have been able to achieve return on assets of 60%, and return on equity of 25% on average.
In its line by line analysis, Conning finds insurers are failing to make the necessary changes in business process needed to build sustainable ROE, steps which are more effective than price increases or underwriting changes, the study contends.
“Other industries notably banking have successfully restructured to reduce costs, increase ROE, and improve financial performance,” the study notes. “The property-casualty industry is overdue for such a change; expense reduction appears to be one of the better places to start.”
This is because expenses reduction is not regulated or subject to competitive pressures to the same extent price is, nor are expenses affected by external factors to the same degree loss costs are.
A 10% expense savings could result in a 25% improvement on ROE, Conning speculates, although the industry has the potential to reduce expenses by far more than 10%.
To achieve this kind of reduction, however, the industry need to: link expenses to the actual work done rather than to premiums in each line of business and in the distribution system; decide what trade-offs they are willing to make to reduce expenses (e.g. reduced expertise); and looking at ways to reduce the workload such as outsourcing.
“Change will occur when companies break out of the pack with sufficient success that other companies will be forced to innovate to follow.”