Even though revenues have climbed for property/casualty insurers in the recent years, underwriting expense ratios “remain stubbornly high,” according to a new report by Fitch Ratings.
Fitch’s analysis of expense ratio trends over the last decade and comparative ratios for the nation’s largest 25 insurers reveals that the average industry expense ratio in 2012 is 28.2—roughly equivalent to the average reported for 2009.
Fitch believes that factors holding back any improvement in carrier expense ratios include greater investments in risk management tools to improve pricing, risk selection and claims management, growing accounting and regulatory compliance burdens, and growth in advertising expenditures for personal lines insurers.
While commission rates have remained steady at about 10.5 points, expenses related to advertising have added 0.9 points to the industry expense ratio of the last 10 years, Fitch reports based on an analysis of data from SNL Financial. Providing another measure of growth, Fitch said statutory advertising expenses have increased 260 percent over the last 10 years.
In addition, other underwriting expense grew 0.7 points over the decade.
Adding an even big chunk were expenses tied to salaries, payroll taxes and employee relations, which grew 1.7 points in the period from 2003 to 2012.
Ranking the 25 largest carriers based on their five-year average net expense ratios (for the five years ended 2012), Fitch reveals that the companies with the highest five-year expense ratios were:
At the other end of the spectrum, companies with the lowest five-year expense ratios were:
Fitch says that long-term profitability does not necessarily correspond with low expense ratios, noting, for example, that W.R. Berkley (five-year average expense ratio 32.5), Travelers (31.9) and Chubb (29.7) all have expense ratios that are higher than the industry average, but that all three of these companies have also reported double-digit average returns on surplus for the five-year period.
The Fitch report also contains a ranking of the 25 largest companies based on their commission rates (the ratio of net commissions incurred to net premium writtens). Here, companies with significant reinsurance operations top the list—with Munich Re America and Alleghany Group (Transatlantic Re) paying the highest commissions on a net basis.
Rounding out the top five are three regional underwriters—Cincinnati Insurance Group, Auto-Owners Insurance Group, and Hanover.
The Fitch report notes that overall underwriting expense levels of individual insurers are a function of operating efficiency, as well as product mix and distribution strategy. In order to consider expense efficiency across insurers, the report compares expense levels of individual insurers with the industry on a premium mix-adjusted basis. In other words, Fitch compares individual insurers’ expense ratios—for 2012 and for the five-year period ended 2012—with one-year and five-year ratios calculated from industry expense ratios by line of business which are weighted according to the company’s business mix.
USAA, Zurich American and Factory Mutual had the most favorable results in these comparisons.
By line of business, surety had the highest 2012 expense ratio (close to 50), followed by commercial multi-peril (mid-30s), while medical professional liability had the lower expense ratio in 2012 (low 20s).
Also included in the report is a graph revealing advertising expense ratios for personal lines insurers. While GEICO, Allstate and Progressive led the pack, the ratios reveal that American Family Mutual, Farmers and Nationwide have also significantly boosted advertising efforts.