One more example of “Wall Street types” trying to screw up the insurance business.
Historically the lines of insurance with the greatest expense ratios have produced the greatest profit. To produce an underwriting profit requires a greater degree of expertise than Wall Street thinks the business should pay for. Every time the industry tries to skimp on the underwriting expense, the loss ratio goes up.
Of course, the other squeeze could be commissions, or producer expense. Again, sometimes the analysts forget what the producers may be bringing to the table in terms of value added.
I agree. First of all, producer commissions are already pretty skimpy and even with the market becoming more competitive, insurers continue to reduce some commissions. Second, if insurers want better underwriting results, they have to train and pay for good underwriters. Underwriting expertise ain’t cheap, nor should it be. Too many insurers have looked to underwriting as a place to lop off salaries over the past several years. The result was underwriters who didn’t know what to do when the hard market arrived.
Insurers can try all they want to computerize the underwriting function, but it will never work. There are too many judgment calls involved for a computer to do it effectively. The underwriting expense, while controllable to some extent, is a necessary part of the business.
I agree with Tim and David but want to add that the one area of expense that the companies have chopped away at over the years (I have been in this business for over 35 years) is in the commission arena. Companies will not be in business if the agencies can’t make ends meet at which point profitability becomes a moot point. Also, without proper compensation, the industry will not attract quality producers and that will significantly exascerbate the problem.
My original agency average commission, all lines in 1980 was close to 20%. I am told that the agency now averages a little over 14%. That is a 30% reduction in Company expense. My guess is that the average company expense reduction does not even approach that amount.
The Agency ranks responded by truly cutting their overhead through technological advancements that were just not met by the Companies. An example of this is the frustrating efforts that have been made over the last 20+ years in trying to get SEMSI in place. The Companies simply want nothing to do with it as they rely and promote their own proprietary system which is driving agents expenses up dramatically. SEMSI would be a tremendous help to those same agents that have taken the bullet relative to commission reductions (and Company overhead).
Bottom line, the agents have certainly contributed significantly and disproportionately to the Company expense reduction historically.
Since the Bean Counters took over the Property/Casualty Industry we have seen less Risk Assessment Underwriting and more Program Coverages by Trade or Industry. This approach lets the Bean Count believe that One Size Fits alls, thencut expense for Field Risk Assessment and Loss Control. Underwriting was also eliminated which has lead to increase High & Low Cycles.
These cycles are much more severe since the Bean Counters have taken over all Property/Casualty Companies. Before the cycles effected two or three majority Underwriters, but others were still in the marketplace Underwriting Risks. I remember The Chubb, Commerce & Industry, Royal Globe and The Hartford. You could take almost any Risk to these Markets and show the Pro’s & Con’s [don’t lie to them] and you could get most any Risk Underwritten [they sent Field Risk Inspectors] at a Fair Cost. Brokers worked hard as most do today and got PAID for their work, Risk Assessment, Loss Control and Sales/Marketing. Today, commissions are cut and if it fits a Program and their Credit Score is high enough, anyone can get a Risk written.
Reducing underwriting talent or cutting commissions are not the only ways to reduce expenses. While I share the concerns that “bean counting” can do more harm than good, there are many opportunities for insurers to reduce expenses. These involve areas such as streamlining collections, claim payments and customer service using new technology that has become available in the last twenty years. When the article discusses parallels with the banking industry, this is where I believe the lessons learned in that industry can be transferred to insurance. Things like customer service websites, electronic bill payment, etc, provide opportunities for cost savings.
I think what they are fundamentally talking about is the concept of overhead reduction. Most other industries have driven paper out of them. If we look at transactional processing industries and the such. Many organizations have embarked on reductions and cuts in processing, but the holy grail of process excellence is often challenged by the regulatory environment. We as an industry need to identify how to migrate to next generation thinking of cost reduction, what can we legally stop doing, what can we streamline and error proof.
The companies that figure it out will be around for quite some time. Competitors that can control the ratios on all sides of the equation and not just on the back of any one group or a sole part of the business will shape our industry. That time is closer than we think.
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One more example of “Wall Street types” trying to screw up the insurance business.
Historically the lines of insurance with the greatest expense ratios have produced the greatest profit. To produce an underwriting profit requires a greater degree of expertise than Wall Street thinks the business should pay for. Every time the industry tries to skimp on the underwriting expense, the loss ratio goes up.
Of course, the other squeeze could be commissions, or producer expense. Again, sometimes the analysts forget what the producers may be bringing to the table in terms of value added.
I agree. First of all, producer commissions are already pretty skimpy and even with the market becoming more competitive, insurers continue to reduce some commissions. Second, if insurers want better underwriting results, they have to train and pay for good underwriters. Underwriting expertise ain’t cheap, nor should it be. Too many insurers have looked to underwriting as a place to lop off salaries over the past several years. The result was underwriters who didn’t know what to do when the hard market arrived.
Insurers can try all they want to computerize the underwriting function, but it will never work. There are too many judgment calls involved for a computer to do it effectively. The underwriting expense, while controllable to some extent, is a necessary part of the business.
I agree with Tim and David but want to add that the one area of expense that the companies have chopped away at over the years (I have been in this business for over 35 years) is in the commission arena. Companies will not be in business if the agencies can’t make ends meet at which point profitability becomes a moot point. Also, without proper compensation, the industry will not attract quality producers and that will significantly exascerbate the problem.
My original agency average commission, all lines in 1980 was close to 20%. I am told that the agency now averages a little over 14%. That is a 30% reduction in Company expense. My guess is that the average company expense reduction does not even approach that amount.
The Agency ranks responded by truly cutting their overhead through technological advancements that were just not met by the Companies. An example of this is the frustrating efforts that have been made over the last 20+ years in trying to get SEMSI in place. The Companies simply want nothing to do with it as they rely and promote their own proprietary system which is driving agents expenses up dramatically. SEMSI would be a tremendous help to those same agents that have taken the bullet relative to commission reductions (and Company overhead).
Bottom line, the agents have certainly contributed significantly and disproportionately to the Company expense reduction historically.
Since the Bean Counters took over the Property/Casualty Industry we have seen less Risk Assessment Underwriting and more Program Coverages by Trade or Industry. This approach lets the Bean Count believe that One Size Fits alls, thencut expense for Field Risk Assessment and Loss Control. Underwriting was also eliminated which has lead to increase High & Low Cycles.
These cycles are much more severe since the Bean Counters have taken over all Property/Casualty Companies. Before the cycles effected two or three majority Underwriters, but others were still in the marketplace Underwriting Risks. I remember The Chubb, Commerce & Industry, Royal Globe and The Hartford. You could take almost any Risk to these Markets and show the Pro’s & Con’s [don’t lie to them] and you could get most any Risk Underwritten [they sent Field Risk Inspectors] at a Fair Cost. Brokers worked hard as most do today and got PAID for their work, Risk Assessment, Loss Control and Sales/Marketing. Today, commissions are cut and if it fits a Program and their Credit Score is high enough, anyone can get a Risk written.
LG
Reducing underwriting talent or cutting commissions are not the only ways to reduce expenses. While I share the concerns that “bean counting” can do more harm than good, there are many opportunities for insurers to reduce expenses. These involve areas such as streamlining collections, claim payments and customer service using new technology that has become available in the last twenty years. When the article discusses parallels with the banking industry, this is where I believe the lessons learned in that industry can be transferred to insurance. Things like customer service websites, electronic bill payment, etc, provide opportunities for cost savings.
I think what they are fundamentally talking about is the concept of overhead reduction. Most other industries have driven paper out of them. If we look at transactional processing industries and the such. Many organizations have embarked on reductions and cuts in processing, but the holy grail of process excellence is often challenged by the regulatory environment. We as an industry need to identify how to migrate to next generation thinking of cost reduction, what can we legally stop doing, what can we streamline and error proof.
The companies that figure it out will be around for quite some time. Competitors that can control the ratios on all sides of the equation and not just on the back of any one group or a sole part of the business will shape our industry. That time is closer than we think.