As per Insurance Information Institute, Progressive and Chubb represent two different stories of the insurance market. Progressive remains to be one of the top three companies in the segment, while Chubb is generally counted as the one of the bottom five of the top ten auto insurers in the United States.
Both the companies have varied business lines that focus on commercial and personal insurance. While Progressive has a greater focus on auto insurance, Chubb has other insurance lines as well. Drawing a contrast between both the insurers can give a more detailed perspective on the case for underwriting losses.
Price & Profitability Vs. Market Share
Progressive has been reporting underwriting profits for a while and has enjoyed a high market share as well. However, in its 2019 statement given in the annual report, the company said the market conditions have turned a little unfavorable. The primary reason attributed to this statement of caution was the lack of increased prices and underwriting profitability coming together for the first time in years. Up until 2019, every year, most of the auto insurers were increasing the prices and yet finding it exceedingly difficult to stay above the breakeven line for underwriting. Due to its scaled efficiencies and focused offerings, Progressive was able to get more market share, while maintaining healthy margins.
In 2019, the price increase over the years paid off a little and the auto insurance industry did not have to increase prices to remain profitable at the underwriting level and maintain a market-share. Progressive lost some market share, but its scale allowed it to maintain profits. That highlights a critical point – insurers can either choose to increase the prices to break even or maintain a market share with thin margins.
Since Progressive is operating at a large scale and has market-leadership, it can afford keeping the prices unrevised. Most insurers that did not have a healthy margin or reserve allocation system would find it exceedingly difficult to continue in the business without having to increase the price and losing market share almost every year.
Volatility at the Underwriting-Margin Level
Chubb, the other major auto insurer from the list, shows a different side of the picture – volatility. Since it operates several business lines, it is difficult to unravel the underwriting losses attributable specifically to the auto insurance segment. However, the North American Personal P&C Insurance can be used as a proxy since it includes automobile insurances.
In 2016, the company made $432 million in underwriting profits which is a healthy figure when analyzed in a silo. However, in 2017, the company made an underwriting loss of $29 million, followed by a $156 million profit in 2018. This shows the high volatility that lies in the underwriting margins.
One Solution, Two Problems- “Data”
Underwriting profitability can be improved, and the volatility of the margin can be brought down with the help of data. Companies can categorize its drivers not only based on their history, age, etc. but analyze the daily driving behavior to predict the likelihood of a claim with insurtech solutions.
Understanding this can help predict the outgoing claims better at a regular interval and adjust the incoming premiums more accurately without increasing the prices for all policyholders based on data to avoid hit on the company’s margins, losing loyal customers due to pricing and risk of high volatility.
What Does this Mean for Smaller Auto Insurers?
On an aggregate basis, the top ten companies in the auto insurance space have directly underwritten about 47.7% of premiums in 2019. And even for these top ten companies, there are visible issues with price & profit vs market share sensitivity as well as underwriting margin volatility. If a relatively smaller company with lack of sophisticated capital structures, high economies of scale, or national presence is concerned, the effect of these issues can be exponential on the forthcoming underwriting losses.
Hence the call for speeding up adoption of innovative solutions requires immediate action from insurers to help underwriters increase efficiency of their models.