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Old 11-26-2017, 11:27 AM
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Question Typical loss ratio to one day become ~90%?

I've been thinking about this for a while, and I was wondering if anyone here has thought the same.

I believe that as technology improves, expenses as a percent of premium will decline. People will get more productive, claims will settle faster, etc. Insurance will become more efficient from a consumer standpoint.

However, in a competitive market, economic profit should be close to 0%, so I was thinking that as expenses decline, rates will also face downward pressure which will cause the loss portion of the premium to take up a bigger %. So I was wondering, will we see a future where you'd see a typical loss ratio of 90%, with an expense ratio of 5%, and an overall combined of 95%?

Another scenario that I picture is that as technology improves, not only do expenses improve but we also get better at controlling losses, keeping them from unexpectedly blowing up, etc. That would put downward pressure on the loss portion and maybe the ratios would keep hovering around the same levels as today.
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Old 11-27-2017, 10:13 AM
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However, in a competitive market, economic profit should be close to 0%


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.
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Old 11-27-2017, 10:14 AM
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Or are you trying to get a job with the California insurance department?
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Old 11-27-2017, 11:35 AM
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Well one big expense is commissions. That could certainly diminish if things get more automated. Some people with the ability to select their own coverages a la Esurance could save on expenses, while someone who wants full-service would might end up paying a bit more.

I've also been amazed how well stock insurers do. I always thought they would struggle because mutual insurers could get by with a lower rate of return, but that doesn't seem to make much of a difference as far as I can tell.

Still 90 seems like a stretch, but maybe 75-80.
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Old 11-27-2017, 11:58 AM
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Yeah, I don't see the forces out there to push expenses down to 5%. Heck, we pay nearly half that percentage in premium taxes alone, and I expect that percentage to go up rather than down. I don't see any legislators lining up to reduce the taxes that an insurance company pays, even if they understand it's a direct pass-through into the rates.
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Old 11-27-2017, 12:02 PM
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Fruit-punch company has set the standard at 80%, FWIW.
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Old 11-27-2017, 03:38 PM
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Or are you trying to get a job with the California insurance department?
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Old 11-27-2017, 03:49 PM
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if the market continues to stay soft, this could be inevitable imo.
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Old 11-27-2017, 03:56 PM
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Or are you trying to get a job with the California insurance department?


ETA: Ninja'd by OnLevel.
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Old 11-27-2017, 03:58 PM
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Still 90 seems like a stretch, but maybe 75-80.
As a former SOA actuary, this looks right to me. Bu what do I know?
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