Navigating the competitive retail P&C market
The global personal insurance P&C market, which has historically seen premium growth of 3%, has risen sharply to over 15% in the last two years. Despite this premium growth, the expense ratio for most insurers remains in the high-cost range of 20 to 30%.
The need for operational efficiency has never been more important. Significant transformation is required to reach the much more competitive expense ratio range of 12% to 15% achieved by a few digital attackers and even fewer incumbents.
In this post, I explore what’s driving the higher expense ratio, how you can change your cost curve, and the value it delivers through profitability, improved customer experience, and increased market share.
Industry dynamics and strategic changes
The consumer insurance landscape is undergoing profound changes. Traditionally, motor and home have been subsidized by more profitable product lines, but in 2024 this has changed due to the following trends:
- Divestment and shareholder pressure: Commercial insurers are divesting non-strategic private lines across Europe and North America. At the same time, private insurers are increasingly focusing on growth, either through intermediary partnerships or by strengthening their direct-to-consumer channels. Additionally, shareholders are placing increasing pressure on insurance companies to improve shareholder returns.
- Functional brick walls: The insurance industry has already benefited from the more obvious cost-saving measures, such as: Such as tactical headcount optimization, real estate optimization and tactical IT optimization, suggesting that the low-hanging fruit of cost reduction has been exhausted. In addition, although affinity and partner business models such as bancassurance are growing rapidly worldwide, they offer limited growth opportunities for insurers, whose expense ratios remain around 20%.
- Evolving market conditions: The rise of autonomous and electric vehicles requires a reevaluation of traditional claims settlement methods. Additionally, the shift in consumer behavior towards a “pick and mix” approach is evident in the evolving structure of home insurance products, moving from bundled to customized coverage options.
Critical Variables Affecting Expense Ratios
Three key factors have a decisive influence on an insurer’s expense ratio:
- Claims settlement methods: Choosing between fully owned, managed or outsourced repair networks can have a significant impact on costs. Each option offers different benefits and challenges that impact the overall expense ratio.
- Customer behavior: Digital adoption is quickly becoming a cornerstone of modern insurance, but can vary significantly from country to country. Insurers must adapt to this trend by offering digital interfaces that meet customer expectations for simplicity and speed.
- Sales channels: The type of distribution also plays a crucial role. Direct sales, partnerships with banks (bancassurance) and digital platforms can offer cost-effective ways to reach customers.
The reward of operational excellence
Insurers have the opportunity to capture a significant share of this in the next few years $170 billion in premiums are at risk if customers switch providers. However, achieving an expense ratio below 20% is critical for those who want to remain competitive, benefit from this growth and remain future-ready.
In my experience, operational excellence in private insurance is demonstrated by:
- Customer loyalty: Increase customer retention from an average of 1.5 years to over 4 years in best-in-class scenarios.
- Efficiency in claims processing: Reducing key-to-key engine repair times from 25-45 days to 8-12 days and home repair times from 237 days to 60 days.
- Expense ratio: Reduction of this crucial key figure from the industry average of 20 – 30% to an optimal 12 – 15%.
Building blocks for a cost-effective structure
Achieving a low expense ratio is not a coincidence, but the result of conscious strategic decisions and investments:
- Overhaul of legacy systems: On-premise remains the most commonly used deployment option for all core systems in the insurance industry (Celent 2023). These legacy systems are typically difficult, if not impossible, to upgrade, slow, and typically come with bespoke and bulky extensions to gain additional functionality as the times and technology landscape continue to change. Not only does this negatively impact the customer experience (e.g. longer time to implement simple customer requests like address changes across platforms, etc.), but it also negatively impacts employee onboarding as employees have to learn a variety of different systems and non-standard manual processes. It is essential to leverage digital transformation beyond just front-end digitalization.
- Streamlining the workforce: Underwriters spend 40% of their time on non-core activitiesThis means a loss of efficiency in the tens of billions every year. If these tasks could be automated or augmented, it would not only reduce costs but also improve agility and responsiveness.
Strategic decisions and leadership
Becoming a private insurer with low expense ratios must be a strategic decision as it will redefine the DNA of the company. This cannot be achieved through platform realignment, deployment of engagement systems on top of legacy technology, or outsourcing alone. Here are 4 strategic ways to shift your cost curve:
- Organizational transformation
Organization transformation is about focusing on matching the right work with the right resource to create a more efficient and effective workforce. The strategic direction must be clear about who the insurer wants to become and sharpen the focus on core customer segments and core products. An insurer with an expense ratio of 12% to 15% cannot afford to be distracted and spend time and effort on things outside of their core business. - Spend optimization
Insurers need detailed insights into and monitoring third-party spending. Saving a third or half of the cost base is a huge step, and if it were easy, everyone would have done it already. Due to the nature of such a colossal cost reduction, it’s worth noting that most of the insurer’s executives have probably never done this before. It is difficult to be a unified leadership team with one voice and one direction. It requires visionary leadership, but one based on fact-based decisions. - Modernization of technology
Insurers must fully focus on streamlining and modernizing IT to enable new capabilities and reduce technology debt. Deciding whether to re-platform programs or create a system of interaction levels is difficult. Trying to take employees on a journey of corporate change, system change and retraining is difficult. The answer lies in having a deep understanding of what the problem is before trying to find the right solution: what causes the effort and cost and the best way to eliminate it. Gen AI is and should be embedded in the minds of every leadership team. Insurers with a strong digital core can move quickly, but most insurers are increasingly recognizing the investments required to implement AI and genetic AI at scale. According to Accenture Pulse of Change Research46% of insurance C-level executives say it will take more than six months to scale generative AI technologies and realize the potential benefits. If applications and data are not in the cloud and a strong security layer is not in place, it is virtually impossible to benefit from Gen AI at scale. - Strategic Managed Services (BPS)
This is where it all comes together – what needs to be true for a customer service representative to press a single button to update a customer’s address change for five products and have that change reflected in the customer’s web portal in real time. By orchestrating customer journeys and internal processes across the middle and back office and deploying intelligent solutions, insurers can finally achieve optimal productivity and superior responsiveness to their customers.
In summary, the journey to achieving a 12% to 15% expense ratio is both challenging and necessary. Insurers must leverage technological advances, optimize their operations and make strategic decisions focused on long-term profitability and sustainability. The future of the industry will belong to those who can efficiently adapt to these evolving dynamics and ensure that they not only survive but thrive in tomorrow’s competitive landscape.
