Insurer Expense Ratios

By, H. Felix Kloman

“Property/casualty insurers’ expense ratios haven’t shown any significant improvement,” says Best’s Review for February 1996. The industry continues to report an incredible (to me) 26.1% ratio of expenses to premiums. I think that this is excessive. Consider that 43% of the largest P/C companies (ranked by premiums) have expense ratios over 30%, topped by American Bankers Insurance Group with an astounding 57.3%! How can companies justify these levels to their customers, especially in a period of down-sizing and expense reduction? Saying that lower expenses are impossible is no excuse. New Jersey Manufacturers Group reported the lowest ratio: 2.7% and four companies reported less than 15% (USAA Group, GEICO Corporation, Community Mutual of Ohio and 20th Century Insurance - all personal lines companies). Of more importance to corporate risk managers is the ratio of American International Group - 16%, a full ten points under the average. AIG may be a company that you love to hate, but it operates more efficiently than the rest of the pack.

The bulk of expense is, of course, commissions and brokerage fees, accounting for over 45% of all expenses. Any material improvement requires rethinking the insurance delivery system. Eliminating commissions would quickly reduce the expense ratio (AIG reported only 4.7% in commissions and brokerage expenses) but buyers would pick up much of the differential in new fees. At the very least they would save some state premium taxes, since most fees are not subject to tax.

ren’t buyers, personal as well as commercial, capable of managing their own purchase decisions on insurance, with limited advice and counsel from agents and brokers? I think so, even though agent and broker


associations and regulators may disagree.

If the insurance industry is to survive and meet competition from other forms of financial services, it will have to offer its financial product at a much lower expense margin, probably less than 5%. Given last year’s Best’s number, it has a long way to go.

Commentary by Rick Mortimer:

As buyers become more sophisticated, the role of the broker changes. As this role changes, so should the compensation of the broker. Fee based consulting on risk financing structure, and insurance market identification, RFP design, coverage analysis and placement is the better method vs. the traditional undisclosed commissions of the past. Fee based consulting puts the consultant/broker on the same side of the table with the client, instead of somewhere in the undefined middle.

Reprint from Risk Management reports April 1996, Volume 23, Number 4. Printed with permission from Risk Management reports editor and publisher H. Felix Kloman, June 1996.