Navigating the competitive P&C personal line market
The global P&C personal line market, which historically saw premium growth at 3%, has risen sharply over the past two years to over 15%. Despite this premium growth, most insurers’ expense ratios remain in the high cost range of 20-30%.
The need for operational efficiency has become more important than ever. Achieving a much more competitive 12-15% expense ratio range achieved by a few digital attackers and even fewer incumbents requires significant transformation.
In this post, we explain the value we offer through higher cost ratios, how to convert the cost curve, and the profitability, improved customer experience, and increased market share.
Industry dynamics and strategic change
The landscape of consumer insurance is undergoing a deep change. Traditionally, motors and homes were subsidized by more profitable product lines, but in 2024 it changed due to the following trends:
- Selling and shareholder pressure: Commercial insurers sell non-strategic personal lines across Europe and North America. At the same time, individual line insurers are focusing on growth by strengthening interim partnerships or consumer channels. Additionally, shareholders are increasingly putting pressure on insurers to improve shareholder returns.
- Operating Brick Wall: The insurance industry has already utilized more obvious cost-saving measures, such as tactical staff optimization, real estate optimization, and tactical IT optimization, indicating that low cost-saving fruits are being exhausted. Additionally, affinity and partner business models like Bancassurance are growing rapidly on a global scale, but offer limited growth opportunities for insurers who remain at the 20% expense ratio mark.
- Evolving market conditions: The rise of autonomous and electric vehicles requires a reevaluation of traditional billing adjustment methods. Furthermore, the shift in consumer behavior towards a “pick and mix” approach is evident in the evolutionary structure of home insurance products moving towards bundled, customizable coverage options.
Important variables that affect expenses ratios
Three important factors are crucial in affecting the expense ratio of an insurance company.
- How to adjust billing: The choice of a wholly owned, managed, or outsourced repair network can have a significant impact on costs. Each option offers a variety of benefits and challenges, affecting your overall expense ratio.
- Customer behavior: Digital adoption is rapidly becoming the basis of modern insurance, but it can change dramatically from country to country. Insurance companies need to adapt to this trend by providing a digital interface that meets customer expectations for simplicity and speed.
- Distribution Channel: Distribution method also plays an important role. Direct sales, bank partnerships (Bancassurance), and digital platforms can provide cost-effective ways to reach customers.
Rewards for operational excellence
Insurers will have the opportunity to acquire a significant portion over the next few years As customers switch careers, $170 billion in risky premiums. However, for those who want to remain competitive, keep this growth down and remain viable in the future, achieving an expense ratio of less than 20% is important.
My experience demonstrates operational excellence in personal line insurance:
- Customer loyalty:Average 1. Increase customer retention from 5 to 4+ years in best-in-class scenarios.
- Billing efficiency:Reduce the repair time of your key-to-key motor from 25-45 days to 8-12 days, and reduce the repair time of your house from 237-60 days to 237-60 days.
- Expense rate:Reduce this important metric from an industry average of 20-30% to an optimal 12-15%.
Building blocks for low-cost structures
Achieving a low cost ratio is not contingent, but is the result of intentional strategic choices and investments.
- Legacy System Overhaul: On-premises remains the most used deployment option in all core systems in the insurance industry (Celent 2023). If these legacy systems are slowly, if not impossible to upgrade, decorated with bulky bolt-ons, usually made-to-order, if not fully-built, then it tends to be difficult to acquire additional features as time and technology situations continue to change. This not only negatively affects the customer experience (e.g., more time to implement simple customer queries such as address changes on all platforms), but also negatively affects employee onboarding as different systems and non-standardized manual processes must be learned. It is essential to adopt digital transformation that goes beyond just front-end digitization.
- Streamline the workforce: Underwriters spend 40% of their time on non-core activitiesrepresenting an efficient loss of hundreds of billions of dollars each year. If you can automate or scale these tasks, this will not only reduce costs, but also increase agility and responsiveness.
Strategic Choice and Leadership
Being an individual insurer with a low cost range must be a strategic choice to redefine the company’s DNA. Re-platforming, systems of engagement on legacy technologies cannot be achieved only through outsourced. Here are four strategic ways to transform a cost curve:
- Organizational transformation
Organizational transformation is focusing on creating a more efficient and effective workforce with the right work aligned with the right resources. The strategic direction must be clear in terms of who the insurance company wants to be. Insurance companies with a cost rate of 12-15% cannot afford to distract the time and effort they spend on anything other than their chosen core business. - Spend your optimization
Insurance companies need clever visibility and monitoring into spending with third parties. Eliminating a third or half of the cost-based was a huge move, and if it was easy, everyone would have already done it. It is worth pointing out that due to the nature of such enormous cost savings, most insurance company leadership has rarely done it before. It’s difficult to be a co-leadership team with one voice and one direction. We need visionary leadership, but we need leadership that is actually rooted in base decision-making. - Modernization of technology
Insurance companies should focus on lasers on streamlining and modernising to enable new features and reduce technological debt. It is difficult to decide which playback program or the system for the engagement layer. It’s difficult to take employees on a journey of change in the company, change in systems, and reskills. The answer lies in a deeper understanding of where the problem lies before trying to find the right solution. It is the perfect course to drive effort and costs and eliminate them. The AI General should be in the minds of every leadership team. While insurers with a strong digital core can move quickly, most insurers have reached the investment they need to implement AI and Gen AI on a large scale. Accenture Pulse of change research46% of insurance C-Suite leaders say it takes more than six months to expand generative AI technology and take advantage of its potential benefits. If your applications and data are not in the cloud and you don’t have a strong layer of security, it’s virtually impossible to benefit from large-scale Gen AI. - Strategic Management Services (BPS)
This is where it all comes together. This is what a customer service agent needs to press one button to update customer address changes across five products, and to reflect this change in customer web portal real-time. By coordinating customer journeys and internal processes across the middle and back office and utilizing intelligent solutions, insurers can ultimately achieve optimal customer productivity and best-in-class responsiveness.
In conclusion, the journey to achieving a cost ratio of 12-15% is challenging and necessary. Insurance companies must embrace technological advances, optimize their businesses and make strategic choices tailored to long-term profitability and sustainability. The future of the industry belongs to people who can efficiently adapt to these evolving dynamics, ensuring that they not only survive, but also thrive in the competitive landscape of tomorrow.
