Higher premiums helped property and casualty (P&C) insurers refill their coffers in 2003. And for many insurers, the long and difficult process of lowering their expense ratios has contributed to their bottom lines. In fact, the insurers with the lowest ratios pin their efficiency on smart moves made a few years ago.
The insurers with the best expense ratios today say they invested early on in their staff, and training, telephone systems and customer service. Now they can sit back and enjoy the ride.
The expense ratio reflects the portion of each net premium dollar acquired that is allocated to marketing, administration and technology expenses, along with brokers’ fees. Net premiums acquired are premiums the insurer received from its customers during the fiscal year, less those sent to reinsurers.
As a rule, direct insurers generally have a lower expense ratio than their brokerage competitors because they have a more cost-efficient distribution network. There are exceptions, though.
Brokerage insurer American Home managed to limit its expense ratio to 11 in 2003, down from 17 in 2001. This means it spent only 11 cents for each dollar of premiums earned. The AIG Canada subsidiary bested all its competitors’ expense ratios for 2003, including direct insurers TD Meloche Monnex and RBC General.
By comparison, the average expense ratio hovered at 29 for the entire Canadian P&C insurance industry in the 2003 fiscal year.
For Michel Cheung, assistant controller at American Home, the company’s decision to trim its expenses while the volume and amount of premiums were rising undoubtedly pared its ratio considerably. “Our premiums have gone up but our expenses did not go up to the same extent,” she said.
RBC General drew the same conclusion. The insurance company, which entered the market in the late 1990s, has now acquired sufficient renown to ease off its investment in marketing, which shaved its ratio from 26 in 2001 to close to 20 last year. “We looked to have our brand out and spent significant dollars on direct marketing. This had an impact on the expense ratio but it has not taken place over the last 18 months,” said Glenn Desouza, planner and analyst at the insurer.
RBC changed its tack, focussing on the activities of its call centre to reduce its expenses and boost its profits, Mr. Desouza added. In addition, direct premiums more than doubled in three years, exceeding $194 million in 2003.
TD Meloche Monnex, boasting the best expense ratio among direct insurers, adopted a similar practice to that of its rival RBC: the insurer emphasizes its staff and the excellence of the training it offers. Just as Rome was not built in a day, achieving the lowest ratio also required years of efforts. “These results don’t happen overnight, because we did things in one year. Investments made a long time ago are now yielding results,” said Alain Thibault, president and CEO of TD Meloche Monnex.
The company reported an expense ratio of 17% in 2003, down from 20% in 2001. Mr. Thibault explained that TD Meloche Monnex had anticipated today’s growth and prepared for it early on. The insurer hired a large number of employees in advance, particularly in customer service, and it invested in technology to optimize its efficiency when the time came.
“We prepared for growth. Because of our earlier actions, we now possess an efficient model,” Mr. Thibault added.
Other major players that successfully reined in their expenses below the industry average include brokerage insurers ACE INA and St. Paul Guarantee. Their 2003 expense ratios were 23% and 26% respectively.
Desjardins General and Wawanesa General also performed admirably, with expense ratios of 21% and 25% in 2003.
Stabilization in 2004
Now that premium increases have peaked, rates may slide in 2004, some believe. This means that companies must avoid relying too heavily on new premium growth to improve their expense ratio, Mr. Thibault warned.
He is banking on increased efficiency or process improvement to reduce the expense ratio even more. “We could introduce new technologies, but the huge gains are still behind us. We will have to work harder to achieve more modest gains. In fact, the more efficient we are, the more difficult it is to find new sources of improvement.”
TD Meloche Monnex, which recently acquired the auto and home insurance of Liberty Mutual, will undoubtedly not report as low an expense ratio in 2004, Mr. Thibault cautioned, but this will only be temporary, until the company absorbs the integration costs.
AIG also believes that the premium increase of 2003 will not be echoed in 2004. Any rise would be smaller and the expense ratio would remain stable, Ms. Cheung said.
RBC concurs. It has already projected the 2004 expense ratio at about 19% or 20%, which is virtually unchanged from 2003. Mr. Desouza noted that if the insurer wants to reduce its ratio over the long-term, it would have to optimize its brokers’ activities. “Our focus is to bring our expense ratio in line with traditional brokers’ distribution costs. Long term, when we get a state of 80/20 (80% is our business is renewal and 20% is new business), our expense ratio should decrease,” Mr. Desouza explained.
The insurers with the best expense ratios claim they are satisfied but still aim to improve their performance over the long term.
Ratios affected by SARS
Some insurers’ ratios were downright disastrous. The travel insurance subsidiary of RBC, RBC Travel, is ranked near the bottom of the heap with an expense ratio of close to 73%.
Mr. Desouza explained that the war in Iraq and SARS affected its results in 2003, and consequently its expense ratio. That said, he added that RBC considers its results in P&C as a whole, and does not differentiate travel insurance from the rest. So this ratio is not that dismal, he pointed out. Over the long term, Mr. Desouza anticipates the ideal expense ratio in travel insurance at about 70%.
The travel insurance subsidiary of St. Paul, Travelers Indemnity, performed even more miserably, with a whopping expense ratio of 84%.