Navigating the competitive P&C personal lines market

The global P&C personal lines market, which historically saw premium growth at 3%, has risen sharply to more than 15% in the last two years. Despite this premium growth, the expense ratio for most insurers remains in the high-cost range of 20 – 30%.

The need for operational efficiency has never been more critical. Significant transformation is required to achieve the much more competitive 12 – 15% expense ratio range which has been achieved by a few digital attackers and even fewer incumbents.

In this post, I explore what is driving the higher expense ratio, how to transform your cost curve, and the value it delivers through profitability, enhanced customer experience, and increased market share.

Industry dynamics and strategic shifts

The landscape of consumer insurance is undergoing profound changes. Traditionally, motor and home were subsidized by more profitable product lines, but in 2024 this has changed due to the following trends:

• Divestiture and shareholder pressure: Commercial insurers are divesting non-strategic personal lines across Europe and North America. Simultaneously, personal lines insurers are intensifying their focus on growing either through intermediary partnerships or by bolstering their direct-to-consumer channels. Additionally, shareholders are increasingly exerting pressure on insurance companies to improve shareholder returns.
• Operational brick walls: The insurance industry has already capitalized on the more obvious cost-saving measures, such as tactical headcount optimization, real-estate optimization, and tactical IT optimization, indicating that the low-hanging fruits for cost reduction have been exhausted. Additionally, while affinity and partner business models like bancassurance are growing rapidly on a global scale, they present limited growth opportunities for insurers whose expense ratios remain around the 20% mark.
• Evolving market conditions: The rise of autonomous and electric vehicles necessitates a re-evaluation of traditional claims adjustment methods. Additionally, the shift in consumer behavior towards a ‘Pick & Mix’ approach is evident in the evolving structure of home insurance products, which are transitioning from bundled to more customizable coverage options.

Critical variables influencing expense ratios

Three key factors are pivotal in influencing an insurer’s expense ratio:

1. Claims adjustment methods: The choice between fully owned, managed, or outsourced repair networks can significantly impact costs. Each option offers different benefits and challenges, affecting the overall expense ratio.
2. Customer behavior: Digital adoption is rapidly becoming a cornerstone of modern insurance, however it can vary significantly country by country. Insurers must adapt to this trend by offering digital interfaces that meet customer expectations for simplicity and speed.
3. Distribution channels: The method of distribution also plays a crucial role. Direct sales, partnerships with banks (bancassurance), and digital platforms can offer cost-efficient ways to reach customers.

The rewards of operational excellence

Over the next few years, insurers have the opportunity to capture a substantial portion of the $170b in premiums at risk as customers switch carriers. However, achieving an expense ratio below 20% is crucial for those who wish to remain competitive, capture this growth and remain viable in the future.

In my experience, operational excellence in personal lines insurance is demonstrated through:

• Customer loyalty: Increasing customer retention from an average of 1.5 years to over 4 years in best-in-class scenarios.
• Efficiency in claims processing: Reducing key-to-key motor repair times from 25 – 45 days to 8 – 12 days and home repair times from 237 days to 60 days.
• Expense ratio: Lowering this crucial metric from the industry average of 20 – 30% to an optimal 12 – 15%.

Building blocks for a low-cost structure

Achieving a low expense ratio is not incidental but the result of deliberate strategic choices and investments:

• Overhauling legacy systems: On-premises still remains the most used deployment option for all core systems in the insurance industry (Celent 2023). These legacy systems tend to be difficult, if not impossible to upgrade, slow and typically adorned with bespoke and bulky bolt-ons to get additional functionality as the times and technology landscape continue to change. Not only does this have a negative impact on customer experience (e.g., longer time to implement simple customer queries like address changes across all platforms etc.), but it has a negative impact on employee onboarding due to the sheer volume of different systems and non-standardized manual processes the employees must learn. Embracing digital transformation beyond mere front-end digitization is essential.
• Streamlining workforce: Underwriters are spending 40% of their time on non-core activities, representing an efficiency loss in the tens of billions of dollars every year. If these tasks could be automated or augmented, this would not only reduce cost but also enhance agility and responsiveness.

Strategic choices and leadership

Becoming a personal lines insurer in the low expense ratio range must be a strategic choice as it will redefine the DNA of the company. It cannot be achieved solely through re-platforming, deploying systems of engagement on top of legacy technology, or through out-sourcing. Here are 4 strategic ways to transform your cost curve:

1. Organization transformation
   Organization transformation is about focusing on aligning the right work to the right resource to create a more efficient and effective workforce. The strategic direction must be clear in terms of who the insurer wants to become and sharpening the focus on core customer segments and core products. An insurer with a 12 – 15% expense ratio cannot afford to be distracted spending time and effort on anything outside of their chosen core business.
2. Spend optimization
   Insurers need granular visibility into and oversight of spend with third parties. Eliminating a third or half of the cost base is a colossal move, and if it was easy then everyone would already have done it. Because of the very nature of such a colossal cost reduction, it is worth pointing out that most of the insurer’s leadership are unlikely to have ever done it before. Being a joint-up leadership team with one voice and one direction is hard; it requires a visionary leadership but one that is rooted in fact-based decision making.
3. Technology modernization
   Insurers need to be laser-focused on rationalizing and modernizing IT to enable new capabilities and reduce tech debt. Deciding on re-platforming programs or deciding on system of engagement layers is hard. Trying to bring the employees along on a journey of company change, systems change, and reskilling is hard. The answer lies in having a deep understanding of where the problem is, before trying to find the right solution: what drives the effort and cost, and which is the best course to eliminate them. Gen AI is and should be on every leadership team’s minds. Insurers with a strong digital core can move quickly, but most insurers are coming to the realization of the investments needed to implement AI and Gen AI at scale. Per Accenture’s Pulse of Change research, 46% of insurance C-suite leaders say it will take more than 6 months to scale up generative AI technologies and take advantage of the potential benefits. If applications and data are not on the cloud, and if there is not a strong security layer, then benefiting from Gen AI at scale is virtually impossible.
4. Strategic managed services (BPS)
   This is where it all comes together – what needs to be true for a customer service agent to press a single button to update a customer’s change of address across five products, and for this change to be reflected in the customer’s web portal real-time. By orchestrating customer journeys and internal processes across the middle and back-office, and by utilizing intelligent solutions, insurers can finally achieve optimal productivity and best-in-class responsiveness to their customers.

In conclusion, the journey to achieving a 12 – 15% expense ratio is both challenging and necessary. Insurers must embrace technological advancements, optimize their operations, and make strategic choices that align with long-term profitability and sustainability. The industry’s future will belong to those who can efficiently adapt to these evolving dynamics, ensuring they not only survive but thrive in the competitive landscape of tomorrow.