Competition is fierce in the U.S. commercial lines market. Expectations continue to increase in terms of price, product and service. Distributors are pressuring insurers to increase commissions and meet streamlined operational requirements or risk losing the opportunity to quote the most preferred business. Moreover, insurers are not only competing against each other; alternative capital has been flooding the market, and new forms of partnerships between capital providers and managing general agents are slowly emerging. Executive SummaryWhile underwriting returns, expense efficiency and asset management each contribute to overall performance, winning companies tend to pull away from the pack based on their underwriting prowess, say experts from PwC. Intense competition and technology advancements have raised the bar on what constitutes an advantage, and companies will need to use technology and analytics to seamlessly and efficiently channel expertise from critical functions in making sound underwriting decisions.
At the same time, a prolonged period of low investment returns has made underwriting profitability increasingly important to drive performance, making lower prices/broader terms unattractive levers to win business.
Based on our study of the 100 largest U.S. commercial lines insurers, clear winners are emerging. The top quintile is getting paid handsomely to generate float, as the premium collected far exceeds the total amount of eventual claims and expenses. While this phenomenon happens in some years for the U.S. P/C industry as a whole, it typically attracts competition, quickly driving down prices and eliminating the opportunity. This makes the significant “cost of float” advantage between the top performers and the rest of the U.S. P/C industry—more than 15 points on average from 2012 to 2016—such an impressive result. Even more telling is that while the performance of the P/C industry as a whole has started to deteriorate, the top performers have actually improved, widening the gap between the winners and the rest of the industry from 14 points in 2012 to more than 23 points in 2016.