Managing General Insurance Management Expenses

BACKGROUND

Management Expense ratios for an insurance company refers to the percentage of premium used to pay the costs of acquiring, writing and servicing insurance and reinsurance products. It can either be obtained by dividing expenses by total written premium or earned premium.

Underwriters sometimes factor in management expense ratios when pricing premiums. Here is an articles reporting regulator's concerns on increasing expense ratios and what has caused a surged in expenses which has the tendency to spiral out of control if left unchecked especially for companies on an aggressive business expansion plan. 

INDUSTRY

Below are some figures & ratios in regards to management expenses (Excluding commission) from non-life Insurance companies of different sizes as at FYE 2013 in Malaysia.

Company	Total written Premium (Gross Earned Premium) RM’000	Expenses (Management expenses) RM’000	Ratio (%)
AXA AGIB	919,999	125,013	13.59
OAC	383,463	59,325	15.47
Berjaya Sompo	516,847	74,599	14.43

ROOT CAUSE

Price war is the usual factor in increasing management expenses in any industry.  For the insurance industry, premium rates come down resulting in management having to increase advertising, marketing, underwriting expenses to compete while commission tends to remain the same.

Here is an article highlighting how management expenses are at an alarming level as revenues have climbed. Link to article as follow:-

-http://www.carriermanagement.com/news/2013/11/13/115492.htm

The article reported that factors causing an increased in  expense ratios include expenses spent in risk management tools to improve pricing, risk selection and claims management (detariff & risk accumulation) and systems to cater to growing accounting and regulatory compliance burdens (GST, Personal Data), and growth in advertising expenditures for personal lines insurers.

RISK AND IMPACT

Companies in the start-up phase are required to compete with MNC insurers enjoying lower expense ratios due to economies of scale.

There is a also concern that high expense ratios could in-directly impact the company’s solvency and the ability to pay claims.

CONCLUSION

Managing management expenses should involve a holistic view rather than micro managing as there are solvency and capital frameworks in placed serving as buffers.

We should always look at cost versus benefits of money spent as high expenses inevitably helps brings in more sales while low expenses helps to keep prices down.

Diligent Monitoring is key to managing expenses as expenses spent on strengthening a insurer’s core process (U/W, Claims, risks management) with systems and processes helps driving down expenses in the long run.