The year 2015 marked the first time in history that 10 property/casualty insurance companies wrote more than 50 percent of P/C net premiums written (NPW). A.M. Best lists approximately 1,200 P/C organizations. Ten of these organizations (I’ll refer to them as carriers for simplicity) write more premiums than the other 1,190 combined.
Market concentration is even higher if one looks at the top 90 carriers (or 7.5 percent of all carriers) by NPW. Combined, they write more than 86 percent of all premiums. This percentage has been consistent for approximately 10 years. Think about this: 90 carriers write 86 percent of all premiums, and the remaining 1,110 carriers write 14 percent. The remaining carriers average .012 of a percent market share each. In other words, any one or any 10 or possibly any 100 of these carriers are arguably superfluous to the industry. A few in specific small niches play important roles, but the clear majority of these carriers really do not matter to the industry. They may matter greatly to specific agents, and they matter considerably to the employees, executives and shareholders of these companies, but they do not matter overall.
Pareto’s Law states, per Wikipedia, that roughly 80 percent of the effects come from 20 percent of the causes. The P/C industry ratio is 86 percent of the effects come from 7.5 percent of the causes—an extreme version of Pareto’s Law for sure. However, just because a carrier is outside the top 90 does not mean the company is not any good or it will not grow to become a top 90 carrier. It does mean it might have a much more difficult road to travel to attain success because the industry is clearly weighted favorably toward larger companies.
But being in the top 90 does not mean, by any stretch, that a carrier has it made. The top 90 carrier list is fairly fluid. For example, 22 companies on 2016’s list were outside the top 90 just 10 years ago. That means almost 25 percent of the 90 largest carriers 10 years ago are, today, smaller in market share or are nonexistent. Which 25 percent will be gone in the next 10 years?
Even compared to just five years ago, 13 new carriers are on the list, which means 14 percent have come and gone. Almost all the comers and goers have market share between 31 and 90. The top 30 carriers, by NPW market share, exhibit more stability. Using the 60 remaining carriers, roughly 20 percent of these carriers turns over every five years.
Within the top 90, almost 25 percent had negative NPW growth in 2016. Almost 9 percent have gone backward each of the last two years, 4 percent have negative growth the last three years, and 3 percent have negative growth the last four consecutive years. So just because a carrier has material market share does not mean it is safe, and just because a carrier is outside the top 90 does not mean it has no future. However, a top 90 carrier with competent management has a far easier future than a small carrier, all else being equal.
As premiums decrease due to technology (auto premiums alone are forecast to decrease 20 percent), carriers are going to fight harder than ever for growth. The small carriers are less likely to have the tools required for this fight. To create some context, personal and commercial auto premiums are roughly $229 billion. If 20 percent of auto premiums are removed, or $46 billion, that is more premium than the second-largest carrier, Berkshire Hathaway, wrote in 2016. (Berkshire Hathaway “only” wrote $39 billion in 2016.) It is more premium than the carriers ranked 14-21 in 2016 collectively write. These are some of the largest carriers in the industry. It is no wonder the carriers are urgently trying to figure out how to replace the premiums that are going to disappear. Some of these decreases will be offset with sales of cyber and other new coverages. However, these facts support the industry’s need to consolidate carriers because there simply is not going to be nearly enough premium to sustain all 1,200 carriers that exist today.
For carriers, the solution is the same as for any small business. If one is not truly big enough to be a generalist, then become a niche player with high-quality products and services. Then go one step further than what most insurance companies have done and actually test the products and services. I have met way too many insurance company executives who think their company is great—the best thing since sliced bread—and yet they have no clue. Moreover, they refuse to test.
Next, invest in technology. That should be obvious, but not all carrier executives see the obvious. For example, I know of company executives that have strategized that with each new acquisition, IT integration is unnecessary. I always wonder how they do their financials, if nothing else. The National Association of Insurance Commissioners (NAIC) and the Securities and Exchange Commission (SEC) might want to ask this question if they are already wondering about a carrier’s financials.
A huge problem many insurance companies have is that their IT systems are old. Updating an insurance company’s system to truly be modern is a Herculean task. New carriers have a competitive advantage in this area. I feel for the older carriers because they really don’t have a choice but to invest large sums wisely, effectively and immediately, if they haven’t already, in their legacy systems. If for no other reason, these legacy systems must be improved so they can be better integrated with the new AI technology.
These factors are why many carriers are clearly setting themselves up to be sold. Most are too insignificant without a niche and without the true leadership ability to develop quality niches. Some are too small, or maybe they are a mutual, and no one will buy them. Those carriers may be in the worst position.
Perhaps a roll-up opportunity exists. A roll-up looks like the strategy a couple of entities are using. Buying insurance companies, especially rolling them up, is riskier than buying agencies. This industry has a long, long history, testified by the many gravestones of serial buyers of insurance companies, that “this acquisition will be different.”
Beyond the industry’s shrinkage, another reason carriers want to buy other carriers is they are adamant they will not let distributors become so large that the distributor does not need the carrier. Historically, carriers have been far larger than their agents and do not plan on losing this advantage.
If a buying frenzy does not occur, maybe buyers can acquire sellers without so much premium that when they discover poor reserving/accounting practice skeletons later, they will have the financial wherewithal to weather the storm. If they have to pay large premiums, company consolidation will likely last much longer.
For agents, choosing which carriers have the brightest future and planting with them is an excellent strategy. Eliminate carriers that do not have enough foresight to see they do not have the wherewithal to survive but do not sell. They just waste away. These carriers do not offer agents any true future benefits.
When choosing which carriers have the best future, a good clue is whether a carrier is already achieving reasonable organic growth without underpricing. Any idiot can underprice. The future requires intelligent leadership and a strategy resulting in quality organic growth. After all, how can an agent grow with a carrier that can’t grow?
Choose carriers that are investing in the agent/broker distribution channel. Few carriers in the top 90 will only use one channel going forward. Using multiple channels does not mean they are a traitor to agents and brokers. Growth is just too important to rely on one channel. A carrier using multiple channels can remain a solid agency partner if it is investing in the agent/broker channel rather than cannibalizing it for other channels.