Thanks to a recuperating job market and stabilized oil prices, the outlook for economic growth in the U.S. has brightened. According to our analysis,1 revenues of select leading companies across most industries have increased by 7% over the last 10 years. The same cannot be said of personal and casualty insurers, whose revenue growth remained below average during the same period. Even from a net premium standpoint, overall premiums for the commercial lines industry grew by only 2% — largely due to a combination of six macro-economic and disruptive trends:
P&C carriers’ capacity to insure has increased over the last 10 years — hitting a record high in 2014. Although the upward trajectory of this trend was temporarily halted during the 2008–2009 recession, the industry continues to add capacity. To some extent, this can be attributed to providers that offer their services online, including Hiscox small business insurance. These dynamics have intensified price-based competition, increased companies’ risk appetite, driven expansion into new markets, and motivated carriers to develop new products and coverages — all factors that conspire against those seeking to profit from premium growth.
Low interest rates.
Although 2014 was a good year for financial markets, interest rates have remained at historically low levels due to efforts to ignite growth and control inflation. Since carriers typically hold a large percentage of their assets in bonds, low interest rates have reduced book yields over the years. In fact, yields have declined by 80 basis points from pre-financial crisis levels – a real concern for commercial lines carriers. Although a gradual increase in rates can overcome this issue, it will take longer for insurance companies to realize returns, since carriers generally invest in long-term bonds. Consequently, they must find other ways to compensate for lower interest rates.
For small commercial accounts whose needs are typically less complex, price is usually the tipping point. In general, small businesses don’t perceive any difference in carriers’ products (similar to personal line insurance), so the nature of their operations, risk exposures, required coverages and maximums are relatively similar. P&Cs’ intermediary-driven business model adds another wrinkle, since agents and brokers are mainly evaluated based on the value they offer customers, which is often based on price. Thus, agents and brokers negotiate with underwriters to get the best coverage for the lowest cost — shifting attention from product differentiation to cost alone, and reducing a carrier's ability to profit from premium growth.
For midsize and large accounts, carriers typically offer customized products, along with value-added services, to address the complex and unique risks of this segment. Consequently, customers tend to stick with existing carriers that are more familiar with their risk profiles. This “stickiness” is especially relevant when carriers underwrite multi-year policies, making it difficult for other players to increase market share. Complicating this issue is the fact that only a few new midsize and large accounts emerge each year. At the same time, major national carriers are considered less flexible when it comes to product customization, especially when serving midsize accounts. As a result, regional insurers tend to offer a higher level of customization in this segment. Either way, customer retention is the top priority.
Networked devices, drones, augmented reality, machine learning, automated advisory services and other emerging digital technologies have uncovered new exposures. Although the market for these individual risks may appear to be relatively small, they can create new revenue opportunities for carriers that adapt and modernize their product and coverage stacks. These developments are also responsible for changing customers’ behavior, which in turn changes their expectations. Many industries are already investing in digital platforms and solutions to improve worker safety, enhance the efficiency of business operations and reduce risk exposures. But with these disruptions, liability can shift from the insured to the providers — device manufacturers, service suppliers, and integration experts, for example. Most carriers have not adapted to these dynamics — lessening their chances of gaining first-mover advantage and realizing subsequent growth.
Businesses are entering a new era, and data is being used as a competitive weapon for gathering and applying insights. Data captured from various digital sources, such as those mentioned above, helps carriers mitigate loss, improve underwriting, manage pricing, personalize products and enrich the customer experience. Given the enormous amount of data now available, some personal lines carriers are already leveraging this information goldmine, with commercial lines insurers following suit at a slower pace. A customer’s Code Halo™ — created by their interactions in the digital world — can be applied by carriers to “decode” insureds’ needs and preferences. Using these digital “footprints”, P&C companies can better anticipate exposures, hyper-personalize products, and price policies accordingly. (To learn more, please read “Building a Code Halo Economy for Insurance”).
As new challenges surface, P&C carriers should focus on partnering with device manufacturers, service providers, and integration advisors to help overcome declining growth. Given recent history, it’s safe to say that traditional operating models will no longer suffice.
The good news is that there are effective ways to overcome these issues.
In Part 2 of this report, we propose compelling strategies that P&C players can employ as they confront the digital future.