S&P surprised by industry control on expenses

While 2004 showed only a small increase in the expense ratio of U.S. p&c insurers, this result came as a surprise to rating agency Standard & Poor’s.
S&P says history suggests periods of declining loss ratios are often followed by an uptick in spending (while conversely, rising loss ratios lead to spending cuts).
Between 1997 and 1999, the industry’s expense ratio increased an average of 0.46% points, while the lagged loss ratio decline an average 2% points. The lagged loss ratio dropped more than six points in 2004, this should have produced a 1.0% to 1.5% point increase in the expense ratio, based on S&P’s regression model. “In fact, however, preliminary date indicate a flat to marginal rise in the expense ratio for the p&c industry in 1004,” notes S&P credit analyst Alan Koerber. “Last year appears to be a statistical outlier, not the anyone has yet noticed.”
S&P speculates on several possible reasons for the stagnant expense ratio, including: industry competition; a declining premium trend; larger economic concerns; cost savings resulting from mergers and/or outsourcing; or even more regulatory or capital market scrutiny.