AM Best


Best’s Special Report: Controlled Acquisition Costs Provide Insurers a Competitive Advantage


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David Blades, CPCU
Senior Industry Analyst – Industry Research
& Analytics
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Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Director, Public Relations
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james.peavy@ambest.com

FOR IMMEDIATE RELEASE

OLDWICK - SEPTEMBER 14, 2017 02:10 PM (EDT)
While much of the U.S. property/casualty (P/C) industry has seen volatile underwriting results due to catastrophes, weather and deterioration in certain lines of business over the past decade, those insurers that have controlled their expense allocations have better positioned themselves to post better operating results, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Controlled Acquisition Costs Provide Insurers a Competitive Advantage,” states that the expenses inherent in writing certain lines of coverage present a distinctly greater challenge to companies striving to improve efficiency while enhancing service capabilities. Companies have been able to compensate somewhat by controlling underwriting expenses, helped mainly by investments in underwriting and claims systems designed to reduce insurers’ losses and the costs of administering policies. This not only helps companies to streamline processes, but also enriches their analytical capabilities and improves their risk management capabilities—all of which enhance their underwriting efforts. Industry underwriting expenses continue to grow, but basically are tracking industry premium growth, resulting in a steady expense ratio of 28% on average over the last five years.

A.M. Best notes that steady, favorable underwriting results that help drive strong operating performance are a key attribute of many companies with consistently higher Long-Term Issuer Credit Ratings; lower expense ratios also help differentiate companies at higher rating levels.

According to the report, contingent commissions, which are the commissions an insurer or reinsurer pays an insurance intermediary (agent/broker) and are usually based on the profitability or volume of business the intermediary produces, constitute a varying but sizable percentage of total P/C industry acquisition costs. Generally, contingent commission ratios rise when the P/C industry performs well, leading to better underwriting results.

Market conditions are likely to remain extremely competitive into 2018, foreshadowing tough times for insurers trying to generate more than modest premium growth while adhering to sound underwriting and pricing principles. This, in turn, will challenge companies’ ability to improve underwriting results and operating returns. Some insurers have been ahead of the curve on systems-related improvements, providing advantages that have allowed them to differentiate themselves from lower-rated, less efficient competitors. In addition, those companies that adequately compensate their distribution partners on the front end, while providing them with potentially lucrative profit-sharing opportunities on the back end, will find themselves in a better position to effectively control acquisition costs.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=265514 .

A.M. Best is the world’s oldest and most authoritative insurance rating and information source.