ACORD Study Highlights Drivers of High Performance Among Top U.S. Insurers

New You can now listen to Insurance Journal articles!

ACORD recently conducted the U.S. Value Creators Study focused on the 100 largest property/casualty insurance groups in the U.S., representing nearly 90% of premiums written and almost 100% of the industry’s market capitalization – $9.1 trillion over the 20 years included in the study. The study analyzed the statutory financial filings of companies in all 50 states, both publicly traded and mutual, and included interviews with senior executives.

The study divided these top 100 carriers into three categories: Sustainable Value Creators, Hollow Value Creators and Value Destroyers. A proprietary free cash flow model measured value creation related to timing, magnitude, duration and sources.

Who Made How Much?

The P/C insurance industry generated $182 billion in value over 20 years. During the 20-year period studied, the P&C insurance industry held $9.4 trillion in capital, which — based on a required rate of return of 7.4% — would imply a cost of capital of $695 billion. Sixty-four percent of the insurers in the study generated cash flows greater than their cost of capital, delivering more than $229 billion in value. The cash flow generated by the remaining 36 companies fell short of the required capital charge by a total of $84 billion.

  • Sustainable Value Creators are insurers meeting required returns through underwriting and investment activities. The top 10% of carriers in the Sustainable Value Creator category generated 78% of the total value created by all 100 carriers.
  • Hollow Value Creators are insurers meeting required returns through investment activities but failing to generate value through underwriting. The top 10% of carriers in the Hollow Value Creator category generated 3% of the total value created by all 100 carriers.
  • Value Destroyers are the insurers failing to generate value over the study period. The top 10% of carriers in the Value Destroyer category destroyed 27% of the total value created by all 100 carriers.

The study found that focusing on underwriting discipline and expense management was key to value creation in the P/C industry. Long-term value creation was important for top-performing carriers.

Sustainable Value Creators – What Are They Doing Right?

The top-performing carriers in the Sustainable Value Creator category focused on long-term value creation, strong underwriting discipline and effective expense management. They had higher underwriting margins, higher return on equity and lower expense ratios. These carriers They achieved an 11.8% return on invested capital, generating $229 billion in value, or 126% of the value created across the 100 insurers in the study. Sustainable Value Creators with NPW greater than $3 billion generated more value per premium dollar than any other cohort — 5.4% compared to a study average of 2.0%.

Sustainable Value Creators also had the highest level of digital capabilities. These companies typically spent more than the average of 3.5% of premium income on IT — some greater than 6.5%.

Sustainable Value Creators wrote a balanced mix of personal and commercial lines. They spent 58.7 cents of each premium dollar on loss costs, versus an average of 61.2 cents. They also spent 11.4 cents on loss adjustment expenses (LAE), versus the average of 11.7 cents. These carriers spent 70.1% of premium dollars on claims versus a top 100 average of 72.9%.

Despite the increase in the cost of capital in recent years, 83% of the Sustainable Creators in this year’s study maintained a high level of performance in at least four of the past five years. More than two-thirds (68%) were classified as sustainable across all five of the past five years.

Hollow Value Creators – Stuck in the Middle

The top-performing carriers in the Hollow Value Creator category had higher investment income but lower underwriting margins and return on equity. Their focus was on investment income but they were weaker in underwriting discipline and expense management.

Hollow Value Creators had higher levels of back-office expenses versus the other cohorts and the top 100 average and a slightly larger commercial book.

The underwriting operations of the 23 Hollow Value Creators consumed $22 billion of the $59 billion in value generated by investments for a net value created of $37 billion. They would have fallen into the Value Destroyer category if not for their investment income.

Value Destroyers – Where Did Things Go Wrong?

In the last year, the Value Destroyer cohort has quadrupled, from 9% to 36% of the companies studied. Many Hollow Value Creators from this same study conducted in 2021 became Value Destroyers in 2022.

The top-performing carriers in the Value Destroyer category had lower underwriting margins and return on equity and higher expense ratios. These carriers showed weak underwriting discipline and poor expense management and lacked focus on long-term value creation.

Value Destroyers tended to focus more on personal lines and generated significantly less value through investment operations on a per-company basis than both Sustainable and Hollow Value Creators — $500 million versus $1.2 billion and $2.6 billion, respectively. Overall, the $84 billion in value destroyed by these 36 insurers was more than the value created by the next 92 Value Creators combined.

Working Toward Sustainability

The study concludes that specific characteristics and practices drive sustainable value creation in the P&C insurance industry. The most successful companies had solid strategies and goals, including:

  • Aligning Strategy and Capabilities: Sustainable Value Creators invested in processes, organizational attributes and technologies that were consciously aligned to support one or more of the fundamental insurance strategies.
  • Execution Excellence: Sustainable Value Creators focused on customer relationships while choosing the right risks, they were more deliberate and focused on the lines of business that they underwrote, and they overpaid their distribution partners and underpaid claims and LAE costs.
  • Change, Talent & Culture: Sustainable Value Creators demonstrated an ability to consistently attract, retain and develop better people and maintain a culture of customer service and innovation.
  • Standardized Data Exchange: Sustainable Value Creators leveraged the benefits of ACORD Standards and other assets for standardized data exchange.

Personal Auto

Interested in Carriers?

Get automatic alerts for this topic.

Source link