U.S. P&C insurers see expense ratios starting to climb

U.S. insurers are starting to see expense ratios – a ratio that has remained consistent over the past four decades – creep upwards, putting greater pressure on profit margins, Fitch Ratings warned in a recent report.
Expense management has taken on greater importance for insurers, given that net written premium has declined for the last three consecutive years due to pressure from competitive market conditions and a weak economy, Fitch said in its Property/Casualty Insurer Expense Analysis.
This decline has fostered a steady increase in the underwriting expense ratio to 28% for full-year 2009, compared with a hard market low of 25% in 2003, the report says.
“Heightened profit pressure has made insurers more greatly aware that a one-point increase in the expense ratio has the same bottom-line impact as a one-point loss ratio increase,” Fitch reported.
Despite investments in automation that have improved insurers’ ability to use underwriting data and manage policy and claims administration processes, expense ratios have not materially improved over time, and the industry expense ratio is currently at the same level that was reported 40 years ago.
“Fitch believes that this lack of expense ratio improvement is reflective of the competitive nature of the property/casualty insurance business, with any gains in efficiency passed on to the customer in the form of price declines,” the report says.
But over the past five years, expense ratios have been steadily increasing, it continues. “As a material market hardening is unlikely in the near term, insurers will continue to be challenged to balance expense structures and still maintain underwriting and service capabilities.”