OLDWICK, N.J.--(BUSINESS WIRE)--According to a new A.M. Best report, an insurer’s decision to expand into new states can have impacts on both its operating performance and business profile. Operating performance can be affected by changes in earnings, underwriting performance and volatility, while A.M. Best also evaluates geographic concentration in its assessment of business profile.
The Best’s Special Report, titled, “Geographic Expansion Offers Both Risk and Rewards,” also analyzes and compares the performance of insurers that operate within a single state with companies that produce business across a broader geographic scope, including national writers. While the median policyholders’ surplus amount of single-state writers is less than a third of large regional insurers by comparison, these single-state writers generate a median return on equity (ROE) that is within a point of the median ROE generated by large regional writers.
Strong single-state writers will have expert knowledge of their markets, well-entrenched relationships with their insureds, as well as established distribution channels. In contrast, national writers tend to compete on economies of scale, leveraging their technology and distribution channels, and are able to take advantage of a wide array of product offerings and expense efficiencies.
The report also notes that single-state and small regional insurers are more volatile than the larger ones, as they can be disproportionately affected by regulatory, legislative, catastrophe, competitive, judicial, and economic risks in their states, and their options to manage the cycle are limited. But, insurers can offset concentration risk in a limited area by utilizing defensible and sustainable competitive advantages, some of which include: control over distribution; access to multiple distribution channels to avoid concentration; a low cost structure; effective use and leveraging of technology; superior service and strong franchise recognition. Having a captive market of insureds and underwriting expertise in a particular book of business can also be beneficial.
Geographic diversification allows for more flexibility. Having multiple operating companies in multiple states allows for more rate flexibility and allows companies to limit business in a specific state when the climate is unfavorable; single-state writers, on the other hand, must ride out the storm, according to the report.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=274503.
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