In last week’s edition of JPMorgan’s Love Actuary, P&C takes time, there’s no such thing as a ‘quick fix’.
Property-casualty insurance can be a cynical industry, even for the most commodity products like auto insurance, says the report, which concludes turnarounds take an average of 2 to 3 years.
There are generally two main issues that need to be addressed in a turnaround. The first is the front book, which is usually about improving prices or reducing risk. The second is the backbook, which may include reserving actions to improve reserve adequacy.
These actions are not mutually exclusive as some companies need to act/decide on both the front book and the back book.
Previous examples of reducing business risk have shown results, but it can be a daunting exercise. This can be done either through the top line deduction, exiting lines of business, or through the use of reinsurance.
Top line cuts and business exit classes can be a powerful tool, although the report warns that ramping up via P&L can result in a better price or a more profitable premium or significant risk reduction. It may take some time to see the benefits of the results.
Alternatively, the report suggests that companies can use reinsurance to reduce their risk. This has been a powerful tool in recent years, especially during the softer stages of the price cycle.
Zurich used this strategy in the mid-2000s to reduce the volatility of its earnings with great success. However, the report argues that in today’s market, reinsurance market coverage that eliminates volatility – such as total coverage – may be either too expensive or simply unavailable, making it a better avenue than before. Could make for a more challenging route.
Another means of reversal for insurers is to improve reserve adequacy to address mispriced deals they may have on their books. Dealing with past problems may involve increasing reserves to deal with future claims or purchasing a specific security, such as a security.
Whichever path P&C insurers take, it is clear that it takes around 2-3 years to see results.