The most profitable line of property-casualty insurance over the past five years was mortgage guaranty insurance, according to a study by AdvisorSmith. Commercial auto liability was the least profitable.
The most profitable line of property-casualty insurance over the past five years was mortgage guaranty insurance, with an average profitability of 30.5%, according to a study by AdvisorSmith. The least profitable? Commercial auto liability, with an average profitability of only 1%.
The study analyzed data from the National Association of Insurance Commissioners (NAIC) on the profitability of 19 types of p-c insurance products based on return on net worth from 2014 to 2019, as well as insurance profitability levels in all 50 states and Washington, D.C.
The average profitability of the p-c industry over the past five years was 7% with the p-c industry writing approximately $697.5 billion in direct written premiums.
While it holds only a small slice of that pie with $6 billion in written premiums in 2019, mortgage guaranty insurance was boosted into the No. 1 position because of rising housing prices and low foreclosure rates. On the other end, commercial auto liability suffered from high loss rates and expenses over the past five years.
“The differences in profitability across lines of insurance will be influenced by differences in loss trends (higher catastrophe losses affecting property insurance lines vs. higher litigation patterns impacting liability insurance lines)," explained Rob Hoyt, Moore Chair and professor of risk management and insurance at the Terry College of Business, University of Georgia.
“On the other hand, improvements or declines in investment returns will have a bigger impact on long-tailed lines than on short-tailed lines," Hoyt continued, identifying “long-tailed" lines as those in which losses develop over a relatively extended period as compared to “short-tailed" lines in which losses are realized and paid relatively quickly.
The most profitable state for p-c was Vermont, with an average of 17.7%, leading the pack of other states with relatively small populations and small insurance markets therefore limiting the number of competitors and improving pricing and profitability. Hawaii and Alaska each had average profitability rates of 14.7%.
The least profitable states were a blend of large states—which tend to have more competition and therefore more competitive pricing—and small states that had high loss ratios. Coming in last, Colorado had an average profitability of 0.2%. Montana's profitability was 2.6%, and Nevada and Georgia each had 3.4%.
As far as what agencies can do to control insurance profitability, “the ability to manage expenses effectively, like in most business, is critical to overall profitability in insurance," Hoyt said. “Digital strategies and the broader adoption of technology in underwriting and claims have been important in insurance to determining how profitable an insurer can be."
AnneMarie McPherson is IA news editor.