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One Financial Plaza Hartford, CT 06103 | www.conning.com
National Association of
Professional Surplus
Lines Offices, Ltd.
Analysis of Non-Loss Costs
by Conning Insurance Research
September 2016
© 2016 Conning, Inc. This research publication is copyrighted with all rights reserved. No part of this research publication may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any
language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
METHODOLOGY
5
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
ANALYSIS OF NON-LOSS COST EXPENSES
7
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language in any form by any means without the prior written permission of Conning.
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.
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language in any form by any means without the prior written permission of Conning.
Non-Loss Costs Fluctuate by Year, but in a Narrow Range
Median Annual Non-Loss Cost Ratios by Year, Selected Lines
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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.
© 2016 Conning, Inc. This research publication is copyrighted with all rights reserved. No part of this research publication may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any
language in any form by any means without the prior written permission of Conning.
Wholesale Commission Ratio Higher Than Retail
Median Annual Commission Cost Ratio, Selected Lines
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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
Wholesale Composite Retail Composite
The wholesale commission ratio is consistently 3 to 4 points higher than retail.
© 2016 Conning, Inc. This research publication is copyrighted with all rights reserved. No part of this research publication may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any
language in any form by any means without the prior written permission of Conning.
Yet Wholesale Non-Commission Ratios Are Much Lower than Retail
Median Annual Non-Commission Cost Ratio, Selected Lines
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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 Composite Retail Composite
Wholesale non-commission cost ratios average nearly 4 points lower than retail.
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language in any form by any means without the prior written permission of Conning.
Results by Line Are Mixed
Median Annual Non-Loss Cost Ratios by Line, Six-Year Average
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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.
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language in any form by any means without the prior written permission of Conning.
PROFILE OF COMPOSITES
13
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language in any form by any means without the prior written permission of Conning.
Business Mix
Wholesale Composite Retail Composite
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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.
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language in any form by any means without the prior written permission of Conning.
Company Size
Wholesale Composite Retail Composite
15
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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%
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language in any form by any means without the prior written permission of Conning.
Company Affiliation
Wholesale Composite Retail Composite
16
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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%
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language in any form by any means without the prior written permission of Conning.
Premium Growth
Aggregate Direct Premium Growth, All Commercial Lines
Prepared by Conning, Inc. Data source: ©2016 A.M. Best Company—used by permission
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
Wholesale Composite Retail Composite
Continued trend of
lower growth, but
less disparity
between the
composites
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language in any form by any means without the prior written permission of Conning.
APPENDIX
18
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
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
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language in any form by any means without the prior written permission of Conning.
22
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