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  #11  
Old 11-27-2017, 06:00 PM
Beach Bum Beach Bum is offline
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90%+ is a stretch, as others say. Look at GEICO or Progressive for an existing model that is largely direct and can profit at higher permissible loss ratios than many competitors. Still, their expense ratio takes a huge hit from advertising and this keeps the target LR from moving that high.

On the commercial side there are often several rounds of agents/wholesale/brokers to pay. On average this can range from say 15% up to 25%, again on average as some lines may pay a much higher commission.

If things became truly direct then you'd probably get to permissible LRs in the 75-85% range, much higher than around 60-65% where they often are today.

If your view is that the agency/broker model will completely disappear how likely is this given how big this industry is right now? Look at all of the M&A and continued expansion of these global brokers. If it were to happen your assumption is that remaining expenses will really slim down in order to get closer to a 90% TLR.

That would imply major staff cost cutting, actuaries too, but also major advertising cuts where companies like GEICO and State Farm pay huge annual expense fees. If all advertising stops then it's truly a commodity market with no name recognition at all. I can't see such global financial powerhouses giving into this.

The future will be interesting.
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Old 11-27-2017, 11:36 PM
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The future will be interesting.
I certainly hope not, I want a really boring future.
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  #13  
Old 11-28-2017, 12:39 AM
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Or are you trying to get a job with the California insurance department?
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Old 11-28-2017, 12:41 AM
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Another situation I see is that when an expense reduction happens in one area, money just ends up being spent in another area to improve another aspect of the product, or whatever, causing the expense ratio to just hover at where it has been.
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Old 11-28-2017, 12:44 AM
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And the expected return on investment in the stock and/or bond markets should also be zero?

Keep in mind that insurance is closer to an investment vehicle given that someone is taking on some form of risk in making a promise to pay an unknown expense (losses) in the future in return for collecting premium today.
I guess what I meant would be more analogous to claims that alpha would be zero in an efficient market.
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Old 11-28-2017, 10:55 AM
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I guess what I meant would be more analogous to claims that alpha would be zero in an efficient market.
<> profit provision = 0
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  #17  
Old 11-28-2017, 03:19 PM
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<> profit provision = 0
I'm not sure what you're getting at, but you're ignoring the basic concept that competitors can underbid anyone who charges above equilibrium price in a competitive market. And I'm referring to what you learn in the first week of a basic economics course.
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Old 11-28-2017, 03:23 PM
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I'm not sure what you're getting at, but you're ignoring the basic concept that competitors can underbid anyone who charges above equilibrium price in a competitive market. And I'm referring to what you learn in the first week of a basic economics course.
Why do you assume 0% profit is the equilibrium price?
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Old 11-28-2017, 03:25 PM
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Why do you assume 0% profit is the equilibrium price?
Think about it. If you are earning a dollar of profit in any way, it won't last for long. A competitor will simply underbid you. The furthest point they'd be willing to underbid you at is the point of 0% profit, which is the equilibrium price.

I'm okay with you guys saying that profits do exist, but you have to admit then that the market is oligopolistic to a certain extent or that we're in an environment of monopolistic competition and not a competitive market.
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Old 11-28-2017, 03:36 PM
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But anyways, I think we're nitpicking here. When looking at the big picture, we're not going to see insurers making a profit of say, 50% year after year because they were really good at reducing expenses. If expenses can even be driven down that far, you'd see rates going down as well.
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