National Association of Professional Surplus Lines Offices ... Report.pdf · The total median non-loss cost ratio for the wholesale composite was lower than the ... Analysis included

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National Association of

Professional Surplus

Lines Offices, Ltd.

Analysis of Non-Loss Costs

by Conning Insurance Research

September 2016



Table of Contents

I. Purpose of Report

II. Executive Summary

III. Summary Methodology

IV. Analysis of Non-Loss Cost Expenses

V. Profile of Composites

VI. Appendix

2



Purpose of Report

National Association of Professional Surplus Lines Offices, Ltd. (“NAPSLO”) retained

Conning Inc.'s Insurance Research Division (“Conning”) to conduct an analysis of

the relative non-loss costs of commercial insurance policies distributed through

wholesale brokerage channels as compared to retail brokerage channels.

3



Executive Summary

Conning measured all non-loss costs relative to premium from 2010 to 2015 for individual

insurance companies that predominantly write commercial insurance.

Two composites were defined and analyzed: a Wholesale Composite, which included 83 individual

companies with $19 billion in premium, and a Retail Composite, which included 266 companies with

$61 billion in premium.

When comparing the two composites, Conning found:

The total median non-loss cost ratio for the wholesale composite was lower than the retail composite by 0.9 percentage

point.

Retail non-loss cost ratios were lower than wholesale in 2010 and 2011; however, wholesale ratios were lower for 2012

through 2015.

The wholesale composite's commission ratio is consistently 3 to 4 points higher than the retail composite, but is offset by

the wholesale composite's non-commission cost ratios that average nearly 4 points lower than the retail composite.

Except for 2010, in each of the six years measured, the annual growth rate in direct premium written for insurers in the

wholesale composite exceeded the annual growth rate in direct premium written for insurers in the retail composite.

4



METHODOLOGY

5



Summary Methodology

Measurement

Conning measured total non-loss costs (commissions; taxes, licenses, and fees; other acquisition

expenses; and general expenses) relative to premiums for individual insurance companies.

Premiums and expenses were measured on a direct basis, excluding the effects of reinsurance or

pooling.

Data Employed

Annual statutory-based financial information for the six years ended 2015.

Analysis included ten lines of business, for insurers that predominantly write commercial insurance. The

ten lines (“Selected Lines”) include other liability, commercial multiperil, commercial auto, allied lines, fire,

inland marine, products liability, medical professional liability, earthquake, and ocean marine.

Development of Wholesale and Retail Composites

Two composite groups of companies were formed as a proxy for retail and wholesale distribution.

Companies were placed into each composite based on a combination of A.M. Best's distribution

identification tag as well as through NAPSLO's company-by-company review, based on NAPSLO's

collective knowledge of commercial insurance distribution.

The selection process resulted in 83 companies representing $19 billion in premium for the Wholesale

Composite and 266 companies representing $61 billion in premium for the Retail Composite.

See the Appendix for a more detailed description of the report methodology.

6



ANALYSIS OF NON-LOSS COST EXPENSES

7



Wholesale Non-Loss Cost Ratios Less Than Retail Ratios

Median Annual Non-Loss Cost Ratios, Six-Year Average, Selected Lines

Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission

8

19.1%

0.3%

5.0% 5.5%

31.1%

15.7%

2.3%

5.8% 7.2%

32.1%

0%

5%

10%

15%

20%

25%

30%

35%

Commissions Taxes Other AcquisitionExpense

General Expense Total

Wholesale Composite Retail Composite

Total non-loss cost ratio for wholesale composite was lower than the retail composite by

100 basis points.



Non-Loss Costs Fluctuate by Year, but in a Narrow Range

Median Annual Non-Loss Cost Ratios by Year, Selected Lines


9

32

.4%

31

.6%

31

.0%

30

.8%

31

.3%

31

.1%

31

.9%

31

.5%

31

.8%

32

.4%

31

.7%

32

.2%

30.0%

30.5%

31.0%

31.5%

32.0%

32.5%

33.0%

2010 2011 2012 2013 2014 2015

Wholesale Retail

Retail non-loss cost ratios were lower than wholesale in 2010 and 2011; however,

wholesale ratios were lower for 2012 through 2015.



Wholesale Commission Ratio Higher Than Retail

Median Annual Commission Cost Ratio, Selected Lines


10

19

.8%

19

.3%

19

.2%

18

.7%

18

.8%

19

.3%

16

.0%

15

.7%

15

.7%

15

.7%

15

.5%

15

.8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015


The wholesale commission ratio is consistently 3 to 4 points higher than retail.



Yet Wholesale Non-Commission Ratios Are Much Lower than Retail

Median Annual Non-Commission Cost Ratio, Selected Lines


11

12

.6%

12

.3%

11

.9%

12

.1%

12

.5% 11

.8%

16

.0%

15

.8%

16

.1%

16

.7%

16

.2%

16

.4%

10%

11%

12%

13%

14%

15%

16%

17%

18%

2010 2011 2012 2013 2014 2015


Wholesale non-commission cost ratios average nearly 4 points lower than retail.



Results by Line Are Mixed

Median Annual Non-Loss Cost Ratios by Line, Six-Year Average


12

31

.4%

32

.7% 31

.3%

31

.2%

33

.4%

31

.0%

32

.0%

31

.5%

29

.0%

28

.5%

32

.1%

34

.6%

31

.9%

31

.9%

32

.9%

34

.0%

31

.5%

27

.6%

29

.8%

29

.9%

25%

27%

29%

31%

33%

35%

37%

Oth

er L

iab

.

CM

P

Com

m A

uto

Allie

d L

ines

Fire

Inla

nd

Marin

e

Pro

du

cts

Lia

b.

MP

L

Qua

ke

Ocea

n M

arin

eWholesale Composite Retail Composite

The lines of business with the greatest differential were: Inland marine: 3.0 points, MPL:

3.9 points, CMP: 1.9 points.

Only the MPL, fire, and products liability lines had higher non-loss cost ratios for wholesale

than for retail.



PROFILE OF COMPOSITES

13



Business Mix



14

OL52%

CMP10%

CA11%

Allied7%

Fire6%

Inland4%

PL4%

MPL3%

Quake2%

Ocean1%

OL29%

CMP25%

CA15%

Inland12%

MPL5%

Fire5%

Allied3%

Ocean3% PL

2%

Quake1%

In each composite, the top 3 lines account for about 70% of aggregate DPW, and were the

same in each composite (other liability, commercial multiperil, commercial automobile).

Other liability dominates wholesale, accounting for greater than 50% of DPW, versus 29%

for retail. Conversely, commercial multiperil's 25% weighting in retail is more than double

the 10% weighting in wholesale.



Company Size


15


In general, larger companies populate wholesale and small companies populate retail, with

twice as many companies with $100 MM or more in DPW in wholesale.

$500 MM+9%

$100 MM to $500 MM

24%

$10 MM to $100 MM

36%

< $10 MM31%

$500 MM+13%

$100 MM to $500 MM

51%

$10 MM to $100 MM

24%

<$10 MM12%



Company Affiliation


16


Virtually none of the insurers in wholesale are standalone entities, while standalone

entities accounted for 21% of the total number of companies in retail.

Based on DPW, entities affiliated with larger groups represented more than 96% of the

premium in each composite.

Standalone21%

Sub of a group79%

Standalone1%

Sub of a group99%



Premium Growth

Aggregate Direct Premium Growth, All Commercial Lines


17

Except for 2010, in each of the six years measured, the annual growth rate in DPW for

insurers in wholesale exceeded the annual growth rate in DPW for insurers in retail.

-2.2

%

5.2

%

12

.9%

11

.8%

7.6

%

2.1

%

6.1

%

-0.7

%

2.8

%

3.4

%

3.6

%

3.2

% 1.2

%

2.2

%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2010 2011 2012 2013 2014 2015 CAGR


Continued trend of

lower growth, but

less disparity

between the

composites



APPENDIX

18



Measurement and Data Employed

Measurement

For the analysis, Conning measured total non-loss costs of insurance companies (“Non-Loss

Costs”), by select lines of business, that predominantly write commercial insurance.

Data Employed

In its analysis, Conning used statutory financial information for the six years ended 2015.

I. Premiums and other data were measured on a direct basis.

II. Companies were analyzed on an individual basis (not on a group basis).

III. The initial universe of companies included 3,061 individual P&C insurers (the “3,061 Company Universe”) that report

statutory financial data to A.M. Best and Company (“A.M. Best”).

IV. No minimum premium size was required for a P&C insurer to be included in the analysis.

V. Included insurers that had at least 70% of total DPW (direct premiums written) in commercial P&C lines of business.

VI. Ten individual commercial lines were examined (“selected lines”). Only companies with an aggregate of at least 70% of

DPW within these selected lines were included.

VII. Selected Commercial Lines:

Allied Lines Commercial Automobile Commercial Multiperil Earthquake

Fire Inland Marine Medical Professional Liability

Ocean Marine Other Liability Products Liability

19



Appendix: Building the Composites

From the 3,061 Company Universe, a total of 349 eligible insurance companies were placed in either

the Final Wholesale Composite or the Final Retail Composite.

A. The Final Wholesale Composite was composed of 83 companies with aggregate 2014 DPW of $19.1 billion.

B. The Final Retail Composite was composed of 266 companies with aggregate 2014 DPW of $60.6 billion.

20

Companies Excluded by Conning from the 3,061 Universe

Number of Companies Excluded Reason for Exclusion

1,605 Companies with less than 70% of DPW in commercial lines

157 Companies with less than 70% of DPW in selected lines

227 Workers' compensation & excess workers' compensation insurers (greater than 50% DPW in this line)

206 Risk retention groups

127 Insurers employing direct response distribution as their predominant or exclusive distribution

59 Monoline surety writers (greater than 50% DPW in this line)

25 Insurers with zero or negative DPW in 2014

20 Workers' compensation state funds and other state facilities

18 Mortgage guaranty insurers (greater than 50% DPW in this line)

13 Financial guaranty insurers (greater than 50% DPW in this line)

14 Crop insurers (greater than 50% DPW in this line)

11 Insurers with outlier expense ratios (above 100%, less than 5%)

6 Captive insurers

4 Companies in liquidation or run-off

3 Two student travel & accident insurers and one trade credit insurer

2,495Total companies excluded prior to NAPSLO's review (removal of 217 companies with < 2/3 of

business either wholesale or retail)

Data source: ©A.M. Best Company—used by permission, Conning analysis



Data Analyzed

Summary of Data Components Analyzed

For each of the companies in the Final Wholesale and Final Retail Composite, Conning analyzed the

following financial measures:

I. DPW

II. Non-Loss Costs (underwriting expenses)

Included in the components of Non-Loss Costs are the following individual expenses:

I. Commissions

II. Taxes, Licenses, and Fees

III. Other Acquisition Expenses

IV. General Expenses

Conning used a median measurement of Non-Loss Cost ratios for each Composite.

I. A median measurement was used as the most representative of the Select Commercial Lines.

II. Use of an average or weighted average would have favored larger companies rather than weighting equally all

companies in their respective Composites.

21



22

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National Association of Professional Surplus Lines Offices ... Report.pdf · The total median non-loss cost ratio for the wholesale composite was lower than the ... Analysis included