Navigating the competitive personal P&C market
The P&C personal lines market, which historically saw premium growth of 3%, has risen sharply to over 15% in the past two years. Despite these premium increases, the average cost for most insurers remains in the high cost range of 20 – 30%.
The need for efficiency has never been more critical. Significant change is needed to achieve a more competitive 12 – 15% average cost ratio achieved by a few digital attackers and a few incumbents.
In this post, I explore what drives higher cost ratios, how you can shift your cost curve, and the value it delivers through profitability, improved customer experience, and increased market shares.
Industry dynamics and strategic shifts
The consumer insurance landscape is undergoing major changes. Traditionally, motors and engines were the most profitable product lines, but in 2024 this has changed due to the following trends:
- Divestiture and shareholder pressure: Commercial insurers split non-strategic personal lines across Europe and North America. At the same time, personal insurance companies are strengthening their focus on growth through middlemen or strengthening their direct-to-consumer channels. Additionally, shareholders are increasingly putting pressure on insurance companies to improve shareholder returns.
- Functional brick walls: The insurance industry has already implemented the most obvious cost-saving measures, such as inventory optimization, real estate optimization, and strategic IT optimization, indicating that the low-hanging fruit of cost reduction is over. Additionally, although affiliate and partner business models such as bancassurance are growing rapidly worldwide, they present limited growth opportunities for insurers whose cost ratios remain around 20%.
- Developing market conditions: The rise of autonomous and electric vehicles requires a re-examination of traditional claims settlement methods. Additionally, the shift in consumer behavior towards a 'Pick & Combine' approach is reflected in the evolving nature of home insurance products, which are shifting from bundled to customizable cover options.
Important variables that influence cost estimates
Three key factors are important in influencing the cost of insurance:
- Claims processing methods: Choosing between fully managed, managed, or outsourced maintenance networks can have a significant impact on costs. Each option offers different benefits and challenges, which affect the cost estimate.
- Customer behavior: Digital adoption is fast becoming a cornerstone of modern insurance, however it can vary greatly from country to country. Insurers must adapt to this process by providing digital communications that meet customer expectations for convenience and speed.
- Distribution channels: The method of distribution also plays an important role. Direct sales, bank relationships (bancassurance), and digital platforms can provide cost-effective ways to reach customers.
Rewards for excellent performance
Over the next few years, insurers have the opportunity to capture a large portion of the $170b in risk premiums as customers switch carriers. However, achieving a cost ratio of less than 20% is essential for those who wish to remain competitive, capture this growth and remain operational in the future.
In my experience, efficiency in personal lines insurance is demonstrated by:
- Customer loyalty: Increasing customer retention from an average of 1.5 years to more than 4 years in high-quality cases.
- Efficiency in processing claims: Reducing key-to-key vehicle repair times from 25 – 45 days to 8 – 12 days and home repair times from 237 days to 60 days.
- Cost estimate: Lowering this key metric from the industry average of 20 – 30% to 12 – 15%.
Building blocks for low-cost architecture
Achieving a low cost ratio does not happen by accident but is the result of deliberate strategic choices and investments:
- Refactoring legacy systems: On-premises is still the most widely used method in all important systems in the insurance industry (Celent 2023). These legacy systems are often difficult, if not impossible to upgrade, slow and are usually adorned with large bolts to gain more functionality as times and the state of technology continue to change. This not only has a negative impact on the customer experience (eg, long processing time for simple customer queries such as change of addresses across platforms etc.), but it has a negative impact on employee engagement due to the high volume of disparate systems and absences. -Standard manual procedures for employees to learn. Embracing digital transformation beyond digitalization is essential.
- Developing employees: Underwriters spend 40% of their time on non-core activities, which represents operational losses in the tens of billions of dollars every year. If these tasks can be automated or added, this will not only reduce costs but also improve efficiency and responsiveness.
Strategic choice and leadership
Being a personal lines insurance in the low cost rating range should be the strategy of choice as it will redefine the DNA of the company. It cannot be achieved solely by redesigning the platform, deploying interoperability over legacy technology, or outsourcing. Here are 4 strategic ways to change your cost curve:
- Organizational change
Organizational transformation is about focusing on directing the right work to the right resource to create a more efficient and effective workforce. The strategy must be clear about who the insurer wants to be and sharpen its focus on key customer segments and core products. An insurer with an average expense ratio of 12 – 15% cannot be bothered to spend time and effort on anything outside of their chosen core business. - Use efficiency
Insurers need granular visibility internally and oversee spending with third parties. Eliminating a third or a half of the cost base is a big move, and if it were easy everyone would have done it already. Due to the nature of such large cost reductions, it should be noted that many insurance companies are unlikely to have done it before. Being a group of leaders united with one voice and one direction is difficult; it requires visionary leadership but based on fact-based decision-making. - Technology development
Insurers need to focus more on scaling and modernizing IT to enable new capabilities and reduce technology liabilities. Deciding on regrouping plans or deciding on a tiered engagement plan is difficult. Trying to bring employees through the journey of company change, changing systems, and rehiring is difficult. The answer lies in having a deep understanding of where the problem is, before trying to find the right solution: what is driving the effort and cost, and what is the best course of action to eliminate it. Gen AI is and should be on the minds of every leadership team. Insurers with a strong digital core can move quickly, but many insurers are coming to the realization of the investment required to implement AI and Gen AI at scale. Per Accenture's Pulse of Change study, 46% of C-suite insurance leaders say it will take more than 6 months to scale productive AI technologies and take advantage of the potential benefits. If applications and data are not in the cloud, and if there is no strong layer of security, then benefiting from Gen AI at scale is almost impossible. - Managed strategic services (BPS)
This is where it all comes together – it must be true for a customer service agent to press one button to update a customer's address change across all five products, and for this change to be reflected in the customer's web portal in real time. By streamlining the customer journey and internal processes between the center and the back office, and using smart solutions, insurers can ultimately achieve higher productivity and best-in-class responsiveness to their customers.
In conclusion, the journey to achieve a 12 – 15% expense ratio is challenging and necessary. Insurers must embrace technological advances, improve their operations, and make strategic decisions consistent with long-term profitability and sustainability. The future of this industry will belong to those who can successfully adapt to these dynamic changes, ensuring that they not only survive but thrive in tomorrow's competition.
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