Standard insurers reach downmarket for nonstandard auto

Implications: PGR ALL TRV FAC AFFM HALL IPCC ASAM 1. Softer market invites auto insurers to consider looser standards for growth. 2. Similar expansion occurred during the last soft market phase in 1998-2000. 3. Pricing techniques are more accurate, but underlying characteristics of nonstandard customers require more than sharp prices. 4. Low retention makes non-claims expenses more important.

Analysis: A recent Conning & Co study, reported by propertyandcasualtynews.com, cited the growth in predictive modeling techniques as a reason why standard auto insurers can successfully expand to insure more non-standard auto risks.  It's true that more sophisticated analytical techniques enable insurers to more accurately price risks of all stripes.  To be accurate, those techniques require data and experience, and standard insurers can use them to shift the boundaries of their target markets a little bit.  Nonstandard insurers can also use the same techniques to peek into the standard market.  The line between standard and nonstandard risks is not bright and not static.

But the techniques cannot change the low retention, high claims frequency, fraud potential and agency habits usually found in the nonstandard segment.  Successful NS auto insurers optimize their policy contracts, distribution management and business processes to their target customer.  It's not impossible, but it's a real challenge for an insurer to successfully execute an auto insurance strategy that includes preferred, standard and nonstandard customers.   PGR, with their relentless focus on process and measurement, has come closest to doing so.

Larger standard insurers (PGR ALL TRV) will eat into the NS segment, pressuring the NS specialists (ASAM FAC AFFM) some during this soft phase of the pricing cycle.  But there's real risk that the newly acquired NS business pressures the standard companies' margins.  If the last two cycles are any indication, NS business will be the first to be jettisoned by the standard companies when the cycle starts to firm.

Look for deteriorating retention and increasing claims frequency from the standard insurers in 2009 and decreasing premiums in the nonstandard segment in 2008.  The best companies will be prepared to manage through these changes.  Look for a reversal in 2009 & 2010.