in my post from january 2019, with respect to protector’s superior expense ratio (7%-8% vs. 15% for peers), i wrote:
“Another possible, more readily available reason that Protector has lower operating expenses than peers is that it relies exclusively on third party brokers for premiums, whereas incumbents invest in proprietary distribution channels”.
i recently met with Protector’s CEO and asked him what he thought of my hypothesis. he told me it was wrong. the in-house distribution that incumbents have built out relates to their consumer business, where protector does not participate. for commercial and public risk, the categories of risk relevant to Protector, the entire industry sources through brokers.
so, if protector’s distribution does not differ from that of incumbents, what explains the lower expense ratio? it seems to boil down to two things.
the first is that protector leverages more modern IT systems than incumbent peers, who run outdated cobol-based backends and whose processes are still significantly paper-based (CEO Sverre Bjerkeli, who has a background in IT, made technology a priority during the company’s early days). protector’s superior systems allow it to make more thorough use of data in underwriting risk compared to peers, who depend somewhat more on finger-in-the-air risk assessments from expensive teams of people.
(aside: at around the time of protector’s founding, the Norwegian regulators, in order to spark competition in its oligopolistic insurance industry, granted big tax breaks to protector and other new entrants who invested in modern IT systems, tax breaks that are no longer available to newcomers).
the second factor relates to a culture of cost discipline and high service levels. the “culture arbitrage” point sounds squishy, but i think it’s real.
because protector operates with lower expense ratios, it can afford to underwrite the same risk at lower prices and provide superior service to its clients. brokers like this and direct volumes to protector…hence protector has been growing premiums by high-teens/year vs. low/mid-single digits for incumbents.
the incumbents in this space are well-run but stodgy institutions focused on maximizing underwriting profits, limiting volatility, and protecting dividends in any given year. Protector, on the other hand, focused on maximizing the total stream of profits – underwriting + investment – over many years.