Lessons Learned from Lower Returns
Leaders who do not excel in evidence-based decision-making risk falling behind the pack, consistently delivering combined ratios that are multiple percentage points higher than the market
In the worst-case scenario, insurers can see uncontrolled performance deterioration. This occurs as rates become inadequate to cover expenses and the cost of capital. Additionally, signings may drop precipitously in the best performing areas of a portfolio, leading stakeholders to lose confidence in the leadership team’s ability to match or stay ahead of the market. Share prices decline and capital is more difficult to attract — and the cost of capital goes up.
The bottom quartile performers over five years in our analysis have weaker growth records and returns on equity below the cost of capital. The insurers in this quartile also share common traits:
- Risk appetite: Reactive to market conditions; risk appetite and portfolio decisions are often taken following shocks to results in segments or business units; constantly remediating parts of the portfolio, mis-timing exit and entry and missing out on profitable growth opportunities through the market cycle.
- Speed and agility: Slow to respond to emerging trends and new opportunities; lingering caution from the past makes them reluctant to play in areas where they perceive outcomes to be too unpredictable; they lose out on early mover advantage in establishing market share or wait too long to take advantage of favorable market conditions.
- Data and analytics: Rely too much on internal expertise and data and build technology in-house, resulting in insular and incomplete insights on risk and unwieldy legacy systems that are creating rigid and unresponsive processes
- Underwriting: Believe strongly in the art of underwriting and their ability to pick and price the best risks in the open market; suspicious of automated and algorithmic underwriting, broker facilities and follow-market plays.
- Talent: Struggle to attract top talent and dependent on long-tenured staff; do not tend to bring in as many people with backgrounds from outside the insurance industry; have reward structures that create silo mentality and aversion to risk-taking.
- Distribution: Allow line underwriters to control independently broker and client relationships with a view to maintaining objectivity and autonomy in risk selection and pricing; this can limit information exchange and leave underwriters making decisions without consideration of portfolio effects and with incomplete data; and it can bring uncertainty and unwelcome surprises into the renewal process for clients.
- Capital: Inconsistent reinsurance strategies and unstructured decision-making lead to higher costs of capital. Poor data quality and lack of transparency with reinsurers can create a lack of trust, a more opportunistic approach and lower quality panel.
Leadership teams of insurers with historically weaker performance face many challenges. They need to drive hard for growth without risking debilitating results. Gathering reliable insights to make the right decisions on where to invest energy, resources and capital for the best returns is a good starting point.
link