Last week’s edition of Love Actuary, by JP Morgan, suggests turnarounds in P&C take time, there is no such thing as a very quick fix.
The report states that P&C can be a cynical industry, even in the most vanilla products such as Motor Insurance, concluding that turnarounds take 2 to 3 years on average.
There are generally two major issues to correct in a turnaround. The first is the front book, which typically involves pricing improvements or reducing exposure. The second is the back book which can involve reserving actions to improve the adequacy of reserves.
These actions are not mutually exclusive, with some companies choosing/needing to act on both the front book and the back book.
Past examples of companies reducing exposure have shown results, but it can be a difficult exercise. This can be done either via top-line reductions, exiting classes of business or the use of reinsurance.
Top line reductions and exiting classes of business can be a powerful tool, though the report cautions that it can take time for results to benefit for better priced or more profitable premiums to earn through the P&L, or for exposure reductions to become clear.
Alternatively, the report suggests companies can use reinsurance to reduce their exposures. This has been a powerful tool in recent years, especially during the softer stages of the pricing cycle.
Zurich engaged in this strategy in the mid-2000s to reduce the volatility in its earnings very successfully. However, the report argues that in today’s market, securing cover from the reinsurance market that eliminates volatility –such as aggregate covers- could either be prohibitively costly or simply unavailable making this previously preferable route a more challenging path.
The other means for insurers to turn around is to improve the adequacy of reserves to address any mispriced business that they may have put on their books. Dealing with the problems of the past can involve either increasing reserves to deal with future claims or purchasing specific protection such as adverse development covers to pass the back book risk on to a third party.
Whichever path P&C insurers choose to follow, the evidence is clear that it takes around 2-3 years for results to be seen.