Navigating the competitive P&C personal lines market
The global P&C personal insurance market has seen premium growth of over 15% over the past two years, compared to historically 3%. Despite this premium growth, expense ratios for most insurers remain in the high-cost range of 20-30%.
The need for operational efficiency has never been greater. Significant transformation is required to achieve the much more competitive 12-15% expense ratio range achieved by a handful of digital attackers and even fewer incumbents.
In this article, we explore the causes of rising expense ratios, how to transform your cost curve, and the value you can deliver through profitability, improved customer experience, and increased market share.
Changing industry trends and strategies
The consumer insurance landscape is undergoing major change. Traditionally, auto and home insurance have been subsidized by more profitable product lines, but in 2024, that has changed due to the following trends:
- Divestment and shareholder pressure: Commercial insurers are selling non-strategic personal lines in Europe and North America. At the same time, personal lines insurers are focusing on growth through partnerships with intermediaries and strengthening direct-to-consumer channels. In addition, shareholders are increasing pressure on insurers to improve shareholder returns.
- Operational barriers: The insurance industry has already implemented more obvious cost-cutting measures such as tactical optimization of workforce, real estate optimization, and tactical optimization of IT, indicating that the easy avenues for cost reduction have been exhausted. Furthermore, affinity and partner business models such as bancassurance are growing rapidly globally, but growth opportunities are limited for insurers with expense ratios hovering around 20%.
- Changing market environmentThe rise of autonomous and electric vehicles is necessitating a re-evaluation of traditional methods of claims adjustment. Additionally, the shift in consumer behavior towards a “pick and mix” approach is evident in the evolving structure of home insurance products, which are moving away from bundled products towards more customizable coverage options.
Important variables that affect expense ratios
There are three key factors that affect an insurance company’s expense ratio:
- How to Adjust ClaimsChoosing between owning, managing, or outsourcing your repair network can have a big impact on costs. Each option has different benefits and challenges that will affect your overall expense ratio.
- Customer BehaviorDigital adoption is quickly becoming the foundation of modern insurance, but it varies greatly from country to country. Insurers must adapt to this trend by providing digital interfaces that meet customer expectations for simplicity and speed.
- Distribution Channel: Distribution method also plays an important role. Direct sales, partnerships with banks (bancassurance) and digital platforms can reach customers in a cost-effective way.
The rewards of operational excellence
Over the next few years, insurers will: $170 billion in premiums at risk as customers switch insurersBut for companies that want to remain competitive, capture this growth, and remain viable into the future, keeping their expense ratio below 20% is crucial.
In my experience, operational excellence in personal lines insurance is demonstrated through:
- Customer Loyalty: Increase customer retention from an average of 1.5 years to 4+ years in best-in-class scenarios.
- Streamlining billing process: Reduce key-to-key motor repair times from 25-45 days to 8-12 days and residential repair times from 237 days to 60 days.
- Expense ratioLower this key metric from the industry average of 20-30% to an optimal 12-15%.
Low-cost structural components
Achieving a low expense ratio is not an accident, but the result of deliberate strategic choices and investments.
- Rethinking legacy systems: On-premise remains the most used deployment option for all core systems in the insurance industry (Celent 2023). These legacy systems are difficult, if not impossible to upgrade, slow, and typically embellished with bespoke, bulky bolt-ons to gain additional functionality as times and the technology landscape continue to change. This not only negatively impacts customer experience (e.g. simple customer inquiries like change of address across all platforms take time to implement), but also negatively impacts employee onboarding due to the sheer amount of different systems and non-standardised manual processes that employees must master. It is imperative to embrace digital transformation beyond just front-end digitisation.
- Workforce rationalization: Underwriters spend 40% of their time on non-core tasksThis represents tens of billions of dollars in lost efficiency each year. Being able to automate or scale these tasks not only reduces costs, but also improves agility and responsiveness.
Strategic Choices and Leadership
Becoming a low-expense personal lines insurer must be a strategic choice because it redefines the DNA of your company. It can’t be achieved by replatforming, rolling out systems of engagement on top of legacy technology, or outsourcing alone. Here are four strategic ways to transform your cost curve:
- Organizational Change
Organizational transformation is about aligning the right tasks with the right resources to create a more efficient and effective workforce. There needs to be clarity in strategic direction in terms of who the insurer wants to be and focus on core customer segments and core products. With expense ratios of 12-15%, insurers cannot afford to be distracted by spending time and energy on anything outside their chosen core business. - Spending optimization
Insurers need detailed visibility and oversight into their spend with third parties. Cutting a third or half of your cost base is a huge move, and if it were easy, everyone would be doing it already. Due to the nature of such massive cost reductions, it’s worth pointing out that most insurance executives have likely never done it before. It’s hard to be a unified leadership team with one voice and one direction. It requires visionary leadership rooted in fact-based decision-making. - Technology Modernization
Insurers need to focus on streamlining and modernizing IT to enable new capabilities and reduce technical debt. Deciding on replatforming programs and engagement layers is difficult. Bringing employees on a company change, system change and reskilling journey is challenging. The answer lies in deeply understanding where the problems are and then finding the right solutions: what is causing the effort and cost and what is the best way to eliminate them. Gen AI should be on the mind of every leadership team. Insurers with a strong digital core can move fast, but most insurers are just beginning to recognize the investments required to implement AI and Gen AI at scale. According to Accenture research, Pulse of change research46% of insurance executives say it will take more than six months to scale generative AI technology and realize its potential benefits. Without applications and data in the cloud and a strong layer of security, it is virtually impossible to realize the benefits of Gen AI at scale. - Strategic Managed Services (BPS)
This is where it all comes together – a customer service agent needs to push a button to update a customer’s address change across five products and have this change reflected in real time on the customer’s web portal. By orchestrating customer journeys and internal processes across the middle and back office, and leveraging intelligent solutions, insurers can ultimately achieve optimal productivity and best-in-class customer experience.
In conclusion, the journey to achieving a 12-15% expense ratio is both challenging and necessary. Insurers must embrace technological advances, optimize their operations, and make strategic choices that align with long-term profitability and sustainability. The future of the industry lies with those who can effectively adapt to these evolving dynamics and not just survive but thrive in tomorrow’s competitive environment.
