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It is “how” commercial lines carriers execute their underwriting strategies, not “what” lines they write that is key to profitable growth for top performers, according to new research from McKinsey.

A section of the consulting firm’s recently published “,” which is devoted to the commercial lines sector of the property/casualty insurance market, summarizes an analysis of combined ratios of two dozen carriers and finds that 40 percent of the insurers’ underwriting performance was driven by the lines of business in which it participates鈥攂ut 60 percent of performance was driven by how it operates.

“This dynamic applies across both soft- and hard-cycle years,” notes the report, with the caveat that regional differences may lead to exceptions to the general observations. Geographical distinctions were not studied for the “what” carriers write part of the analysis.

What exactly does McKinsey mean when it refers to “how” an insurer operates?

The firm identified four ways in which top-quartile performers in commercial P/C insurance achieve sustained profitable growth and competitive advantage:

• They have clear strategies to capture profitable growth.
• They invest in modernizing underwriting.
• They reduce acquisition costs while navigating a changing distribution landscape.
• They achieve operational efficiencies to manage administration expenses.

Expanding on the first point, the report notes that leaders go a step further than engaging in active portfolio management by setting out clear value propositions and risk appetites that are well communicated鈥攗nderstood internally and externally. They also make focused investments in capabilities that guide execution, such as specific channels and talent.

“Leading insurers are twice as likely as lagging peers to have publicly announced clear and targeted growth strategies,” the report says, further discussing strategies that might include investing in more surplus lines growth for those participating in the E&S space or pursuing models that require limited underwriting involvement, such as writing premiums through managing general agents or operating as “smart followers”鈥攁n algorithmic underwriting approach identified by McKinsey as a current growth driver in the Lloyd’s of London market. Another clear strategy involves making the most of a distinctive capability, the report says, describing strategic bets in specialized niches鈥攕uch as a D&O writer that decides to create an niche offering for a specific sector, like private equity.

Specialty Lines Not the Answer

Earlier in the report, however, the consultants were clear that specialty lines isn’t the ticket to consistent profitability. A high-level, industrywide analysis shows combined ratios for specialty lines coming in below 100, while other lines (accident, property and motor) sat above breakeven over the current cycle. A deeper look at specialty-focused insurers by McKinsey found that their net combined ratios exhibited a high degree of variability compared with their more diversified peers, the report says.

The report then describes an analysis of the performance of 25 global commercial P/C insurers during the past decade and notes there is not a strong correlation between premium growth. But there are “clear leaders that are able to sustain differentiated performance over time,” the report says, separating the carriers into quartiles based on combined ratios for the two halves of the decade ended in 2023.

Most insurers stayed in the same performance quartile over the past decade. This was particularly evident for seven top-performing carriers. Five out of seven that were ranked among the top performers in the 2013-2017 period were still in the top-performing percentile for the 2018-2023 years. During the same time frame, only two of 11 insurers in the two middle quartiles moved to the top, and none from the bottom quartile made it to the top.

How McKinsey Settled on the ‘How’

Diving deeper into the formula for sustained profitable growth, McKinsey sorted out the “how” vs. “what” profitable carriers write by giving all carriers the same portfolio mix and analyzing the results, according to a footnote in the report.

Specifically, the footnote explains that the “analysis calculates an artificially weighted combined ratio for 24 global commercial lines insurers based on industry business line weights. It uses an industry-weighted business line mix while maintaining each insurer’s combined ratio performance in individual business lines.”

“The relative outperformance or underperformance of these artificially weighted combined ratios is then compared to that of the realized combined ratios,” the note concludes, explaining that this comparison was used to assess the impact of the “how” versus “what” for these commercial lines underwriters.

“While effective portfolio strategy should not be disregarded, execution matters even more,” the report’s authors conclude. They also suggest, however, that bottom-performing carriers may still benefit from paying attention to line of business mix.

“Execution always matters,” but the contribution of the “how” part of underwriting matters more for top performers than those ranked at the bottom. For top performers, roughly 60 percent of performance relates to execution. For insurers in the bottom quartile, the executive contribution to performance falls to 52 percent

“This suggests top performers may be focusing on lines of business in which they have already established a ‘right to win,’ while bottom performers have a greater opportunity to improve their portfolio choices.”

“Once insurers establish the right portfolio mix in which they have the right to win, sustaining performance requires doubling down on the capabilities that drive strong execution. For those in the bottom performance quartile, both levers can make a meaningful difference,” the report says.

The ‘How’ for Leaders vs. Laggards

In addition to reporting that top-performers are two-times more likely to have publicly proclaimed targeted growth strategies, the McKinsey analysis offers the following statistics about the other execution levers that support profitable growth:

• Top performers are almost twice as likely to have made significant modernization investments in underwriting operations relative to peers in the bottom performance quartile.
• Leading insurers decreased their acquisition expense ratios by two percentage points on average between 2013-2017 and 2018-2023, while lagging peers saw their acquisition expense ratios worsen by two percentage points.
• Insurers in the leading performance quartile, on average, maintain administration expense ratios two percentage points lower than their peers.

On this last point, however, the report stresses that managing administration expense ratios won’t be enough to pull commercial lines insurers through an impending soft market cycle. To account for a slowing rate environment, McKinsey restated administration expense ratios that came in around 13 percent of gross earned premium for 2021-2023 to normalized levels鈥攕tripping annualized inflation from the numerator (5 percent) and annualized rate hikes from the denominator (10 percent)鈥攁nd found that the normalized ratios are higher than ratios recorded five years ago. Specifically, the normalized ratios were 16.1-17.5 percent for the last three years vs. 15.1 percent in 2018.

In dollars, McKinsey calculates that insurers will need to eliminate nearly $10 billion in expenses to maintain the same ratio of administration expenses in 2023 as in 2018.

Topics Profit Loss Commercial Lines Business 热点黑料