How ‘Intelligent’ Insurers Grow and Create Value: ACORD Study

Some insurance carriers grow but do not create value. Others shrink but still create value. Some fail at both.

Then there are the “intelligent growers” — those that succeed at both, not only growing but also creating value.

Intelligent growers — that’s the term to remember from the latest insurance carrier study from the industry’s standards and data organization ACORD, a study focusing on the link between premium growth and value creation.

For the study, ACORD CEO Bill Pieroni and his team looked at 20 years of data from the 200 largest global insurers that write $2.4 trillion in premium, or 46% of all the world’s premium dollars. This study, “Intelligent Growth: Intent, Decisions, Outcomes,” was sponsored by Duck Creek Technologies.

Pieroni presented some of the findings to member companies at this year’s ACORD Connect Conference in Boston in October. He also discussed the report in more detail in an interview with Wells Media.

The crux of the study was matching global premium and market share growth versus value creation. Value creation was measured by one of two economic factors: combined ratio for property/casualty insurers and by return on assets for life insurers.

For property/casualty writers, the average combined ratio over the 20-year time period was 99.8, or a thin margin of only two cents of every premium dollar. The average return on assets for the life writers over this time period was 0.9%, less than a percent a year.

Of the 200 studied, there were 93 carriers that actually had superior economics based on combined ratio or return on assets and there were 107 that had inferior economics.

When looking at just the P/C insurance industry globally, there weren’t wide variations in combined ratios. “There’s a number of hypotheses we have there — price transparency, the fact that if you think about supply and demand economics, if one carrier is doing extremely well, it’s relatively easy in the P/C segment to actually go in and compete those profits away,” said Pieroni.

However, there were “wild extremes” in terms of market share losses and gains.

The researchers grouped carriers into several categories:

• Of the 200 carriers, 73 were called waning carriers. These are carriers that have inferior combined ratios or return on assets and actually lost market share globally. “They may have grown; they just did not grow strongly enough to increase market share.”
• Second is the category of 34 insurers exhibiting unsustainable growth. They are growing but they’re not making money.
• Also, 38 carriers exhibiting unsustainable profitability. They are essentially the inverse of the above — they’re creating value, but shrinking.
• Lastly, are the 55 global insurers categorized as intelligent growers. These carriers not only gained market share over the last 20 years but also achieved better combined ratios and profitability. They both grew and created value.

If ACORD’s study shows one thing, it is that choosing growth over profitability is not an intelligent strategy.

In one analysis, Pieroni looked at return on equity for the 139 of the 200 that are publicly traded. The other 61 are mutuals, reciprocals or cooperatives.

Pieroni said he understands that carrier CEOs may experience relentless pressure to grow. “I get that. But growth without superior economics is punished by the marketplace,” he said.

The group of 139 public carriers “wildly outperformed the S&P 500,” Pieroni said. Overall, the 139 public carriers had a total shareholder return within this time period of 390% better than the S&P 500 index.

The best carriers, the intelligent growers, saw share returns of 558%. Even firms that did not grow but were profitable reported a 460% return.

But those that grew but did not achieve superior economics had a total shareholder return of 204.7%, or a 186% reduction from the 390% industry average in the study.

“This proves that growth versus profitability, you are far better off achieving profitability,” he said, acknowledging that many insurers have had trouble growing over the last several years because of soft pricing, yet they have remained profitable. “It has to be incredibly difficult to withstand the pressures if you’re publicly traded to say, ‘Why are you not growing?”

On average, the combined ratio for the entire P/C group of carriers studied was 99.8. The intelligent growers came in at 96.1. “Not a huge difference, right? But it shows it is very difficult,” the ACORD executive said. The worst performers had a 103.9 combined ratio.

Pieroni discovered that the worst performers, or waners, actually spent more money than the average on underwriting but ended up with worse results.

“It begins to indicate that intelligent growers had superior underwriting capabilities, not in terms of economics, but in terms of understanding the risk and then managing loss costs,” Pieroni said.

What did the intelligent growers do that made them so successful?

“It’s common sense,” explains Pieroni. “We, as an industry price a product, sell a product, manage loss costs, get a decent investment return and round and round we go. The thing is they did it and they did it for 20 years, day in, day out. And all of the stuff may look trivial, but it’s hard work to do on an annual basis.”

From a strategic standpoint, the intelligent growers have an explicit strategic intent, the essence of which is resource allocation. “If your strategy is to have a really differentiated product or really understand consumers and deliver a superior experience or do all of it, are you allocating resources to get it done? They did.”

The winners think about growth in horizons into the future, not one-time goals. They are interested in laying the foundation for future growth, being a real steward for the organization, despite the fact that shareholders may want a dividend. “These leaders, these organizations have the discipline to systematically invest,” he said.

According to Pieroni, CEOs can choose to increase earnings per share in the quarter or invest for growth. “It’s always easier to buy back stock and declare dividend than to invest. And that strategy works until it doesn’t and you’ve systematically under invested in infrastructure and you can no longer compete,” he said. “Which is why in most industries change occurs by the exit of existing firms and the entry of new. These firms are investing for continuing renewal.”

In terms of products and markets, these carriers have a “defensible business model,” which Pieroni describes as having a moat that protects them from price competition, an economic shock or a big change in the marketplace. Their brand positioning and customer loyalty are such that consumers are not going to leave to save 5%.

“We’ve experienced a number of strategic inflections, some regulatory in nature, some macroeconomic, some technology related. These intelligent growers managed these inflection points far better off, going back to the change concept,” Pieroni said.

These organizations value both organic growth as well as growth via mergers and acquisitions. They didn’t avoid M&A but neither did they solely rely upon M&A as a source of growth.

The study also revealed that E&S/specialty companies don’t fare well over the long term. Pieroni suggests one reason why might be that excess and surplus writers were growing but not profitable.

“I think what happens is capital is a raw material for what we do. So, you’ve been given money either through private equity or funding or some seed money,” he said. “The intent was, ‘I’m going to write this specialty business because specialty business should be profitable by its very nature. It’s specialty, not a lot of competition.’ And I think they set up an operating model which says, ‘This is what I’m going to do.’ And then they get in there and there’s an excess of capital sitting in that space.”

Then it becomes difficult to identify and exploit opportunities in the marketplace to make profit because it gets competed away because all specialty carriers are then slugging it out, Pieroni said.

“True specialty should mean you’re one of the only writers on the planet,” he said. “How do you say that I’m a specialty writer and there’s 10 of you?”

Pieroni doesn’t believe the result is because of a lack of historical data either.

“In theory, if you’re a specialty lines writer, you should be tapped out in the first 30 days because you bound it all. You shouldn’t have capacity there,” he said. If not, raise the price. “Why don’t they raise the price? Because there is supply,” he said. “You can’t raise prices because it’s really not specialty is it? Yes, it’s specialty because you write something very unique, but you’re not special because there’s lots of capital. They’re chasing it.”

Pieroni says the chase is what explains the results.

“We can dig in and find it out. But if you’re a specialty lines writer and there’s no one else with that, why the heck aren’t you charging [adequate prices]? Because you can’t,” he said. “And why don’t we do something else? Because your whole business model was configured around that specialty line. What do you do? There’s nothing you can do.”

The finding was “shocking,” he added.

“Maybe what it says is that specialty lines writers are having a difficult time over the long term,” he noted. “You remember this is 20 years; it’s not 20 months, right? Twenty years over the long term, it’s really counterintuitive that they didn’t really earn superior results.”