March 2016 | CIPR Newsle er 23

D G : P C P M S

By Jennifer Gardner, NAIC Research and Actuarial Manager This ar cle features an analysis of market concentra on and profitability for several property and casualty lines of business. Insurer profitability results can be used in con-junc on with concentra on sta s cs to determine whether a market is a rac ve to insurers to enter (i.e., thereby cre-a ng greater compe on) or una rac ve (i.e., causing in-surers that are in the market to leave). Persistently high levels of profitability could indicate that a market is failing to a ract compe tors, thus enabling non-compe ve rates of return to be earned. The data referenced in this ar cle was derived from the 2015 Compe on Database Report which contains infor-ma on from the NAIC database and the NAIC 2015 Report on Profitability by Line by State (Profitability Report). The Compe on Database Report provides data for five person-al lines and 10 commercial lines countrywide, as well as by state or territory. The report provides reference measures that serve as a star ng point for studies of compe on and can provide insight when used to make mul -state and mul-

-year comparisons. The report should not be used exclu-sively to determine whether compe on exists in a par cu-lar state or line of business. M C Market concentra on reflects the degree of compe on in a market. There are several methods that exist to examine market concentra on. The Compe on Database Report uses methods contained in the Property and Casualty Com-mercial Rate and Policy Form Model Law (#777) for deter-mining compe on. One method, the concentra on ra o, assesses the market share of the four largest groups in an insurance line. This tradi onal measure of market concen-tra on is o en used as a rough indicator of market compe-

on. While there is no formal way to determine market

compe veness based on this calcula on, values above 50% suggest concentra on at least be given a closer look in judg-ing the overall compe veness of a market. Figure 1 shows the market share of the four largest groups, denoted as a percentage, for medical professional liability, homeowners mul ple peril, financial guaranty and mort-gage guaranty. As illustrated in Figure 1, two of these lines exceeded the 50% concentra on threshold in 2014: finan-cial guaranty and mortgage guaranty. Another widely used measure of compe veness listed in the Compe on Database Report is the Herfindahl-Hirschman Index (HHI). The HHI measures the size of firms in rela on to the industry and indicates the amount of com-pe on among them. It is calculated by summing the squares of the market shares (as a percentage) of all groups in the market. Although there is no precise point at which the HHI indicates a market or industry is concentrated highly enough to restrict compe on, the U.S. Department of Jus-

ce (DOJ) has developed objec ve guidelines with regard to corporate mergers. Under corporate merger guidelines used by the DOJ, a post-merger market with an HHI of less than 1,000 is considered to be a compe ve marketplace; a post-merger market with an HHI between 1,000 and 1,800 is considered to be a mod-erately concentrated marketplace; and a post-merger mar-ket in excess of 1,800 is considered a highly concentrated market. Because these numbers are guidelines, judgment must be used to interpret what informa on is provided for a par cular market by its HHI. Figure 2 illustrates the HHI for these same four lines by wri en premiums. Based on the HHI guidelines, two of the four markets are considered rela vely unconcentrated, and

(Continued on page 24)

87.65%

79.36%

41.51%

26.25%

0% 50% 100%

Financial Guaranty

Mortgage Guaranty

Homeowners Multiple Peril

Medical Professional Liability

F 1: M S F L G F 2: HHI B P

313 652

1,729

3,147

0

500

1,000

1,500

2,000

2,500

3,000

3,500

MedicalProfessional

Liability

HomeownersMultiple Peril

MortgageGuaranty

FinancialGuaranty

24 March 2016 | CIPR Newsle er

D G (C )

the DOJ would most likely not challenge a merger that would leave the HHI in that range. Mortgage guaranty is considered moderately concentrated, and financial guaran-ty is considered highly concentrated. P The Compe on Database Report also includes informa on by line by state on premiums wri en, number of sellers (groups), number of entries in the past five years, number of exits in the past five years, market growth over the past 10 years, market shares for risk reten on groups and surplus lines insurers, and a 10-year mean of return on net worth. The return on net worth stated in the Compe on Data-base Report is obtained from the Profitability Report. It is calculated to help regulators and others evaluate the profits earned in a par cular market in rela on to the net worth commi ed to that market. Figure 3 displays the 10-year mean return on net worth for property and casualty lines of business over the period of 2005 to 2014. Figure 4 shows the return on net worth in the property and casualty insurance industry over the past 10 years. Over the period of 2005 to 2014, the property and casualty insurance industry had an average return on net worth of 6.7%. In 2013, several companies experienced an increase in sur-plus as favorable loss development trends, and lower than an cipated claim costs led to reserve releases. Premium growth in many lines, be er accident year results and fewer catastrophic events contributed to surplus growth and high-er profits for the insurance industry in 2013. However, mul-

ple lines of business experienced loss of premium growth in 2014. Premiums wri en for financial guaranty decreased over 20% from 2013 to 2014. Premiums wri en for mort-gage guaranty and medical professional liability also de-creased, although much less substan ally. Losses incurred increased for several lines of business in 2014, leading to a decrease in the return on net worth for the industry to 6.6%, slightly less than the 10-year industry average.

F 3: R N W | 10-Y M

F 4: R R N W P C I

A A

Jennifer Gardner is a manager in the NAIC Research and Actuarial Department. She joined the organiza on in 2011. Ms. Gard-ner conducts economic and sta s cal research for the NAIC and its members. She is responsible for publishing various sta s cal reports including the Report on

Profitability By Line By State and the Compe on Database Report. She provides support for numerous NAIC working groups and assists the state insurance departments in data collec on related to catastrophe. Ms. Gardner earned a bache-lor’s degree in business administra on with an emphasis in finance from the University of Missouri-Kansas City. Prior to joining the NAIC Research and Actuarial Department, Ms. Gard-ner worked on the State Based Systems (SBS) products and services within the NAIC.

March 2016 | CIPR Newsle er 29

© Copyright 2016 Na onal Associa on of Insurance Commissioners, all rights reserved. The Na onal Associa on of Insurance Commissioners (NAIC) is the U.S. standard-se ng and regulatory support organiza on created and gov-erned by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best prac ces, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collec ve views of state regulators domes cally and interna onally. NAIC members, together with the central re-sources of the NAIC, form the na onal system of state-based insurance regula on in the U.S. For more informa on, visit www.naic.org. The views expressed in this publica on do not necessarily represent the views of NAIC, its officers or members. All informa on contained in this document is obtained from sources believed by the NAIC to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such informa on is provided “as is” without warranty of any kind. NO WARRANTY IS MADE, EXPRESS OR IM-PLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION. This publica on is provided solely to subscribers and then solely in connec on with and in furtherance of the regulatory purposes and objec ves of the NAIC and state insurance regula on. Data or informa on discussed or shown may be confiden al and or proprietary. Further distribu on of this publica on by the recipient to anyone is strictly prohibited. Anyone desiring to become a subscriber should contact the Center for Insur-ance Policy and Research Department directly.

NAIC Central Office Center for Insurance Policy and Research 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197 Phone: 816-842-3600 Fax: 816-783-8175

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