According to a new report from AM Best, increases in US P&C insurers’ underwriting expenses have been offset by commensurate increases in net premiums written, which has resulted in stable expense ratios over the past decade.
The report notes that over the past decade, US P&C insurers have found controlling underwriting expenses easier than selecting and pricing risks on a net basis.
Best states that net underwriting results, reflected in P&C insurers’ net loss and loss adjustment expense ratio, have fluctuated due to risk factors that have elevated the incurred loss ratio in certain years.
Private passenger auto underwriters and workers’ compensation underwriters, have both been at the forefront of the industry’s push to use improved technology platforms and enhance operational efficiency in underwriting and claims handling.
However, Best highlights that despite the increases in expenses, they have still risen at a slower rate than net premiums written.
Meanwhile, the report addresses how insurers have also sought to obtain profitable business through name recognition, mainly advertising and other underwriting expenses, primarily agents’ commissions.
Best notes that the few companies making the greatest use of advertising are by far the leaders in advertising spending, as the five largest advertisers accounted for nearly 70% of all industry advertising in 2021.
Christopher Graham, senior industry analyst, industry research and analytics, AM Best, said: “Each of the companies that have spent the most on advertising has a well-known character or mascot associated with its brand, which has enhanced its brand recognition and facilitated sizeable top line premium growth the past five years.
“Progressive, Allstate, Berkshire Hathaway, which owns GEICO, and State Farm all surpassed $1.0 billion in advertising expenditures and have a significant share of the highly competitive and compulsory personal auto market.”
The top 20 companies with the highest advertising expenses as a share of premium, led by Elephant Insurance Company and Lemonade Insurance Company, 10 posted a return on equity below 10% in 2021.
Morey, Best stated that a lower ROE is to be expected from insurtech startups, as they spend heavily on advertising to build market share.
David Blades, associate director, industry research and analytics, AM Best, commented: “Higher-rated companies are much more efficient with their underwriting expenses, as shown by their lower expense ratios.
“This suggests that strong balance sheets, consistently favorable operating performance, solid business profiles, and effective enterprise risk management, which lead to higher credit ratings, also benefit a company’s market standing.”
