Size may not be all it’s cracked up to be in the life insurance business after all, according to a new study by consultancy Conning Research and Consulting. The study found that a surprising number of successful small US life companies continue to thrive despite consolidation in the market, remaining highly adaptive in a fluid life marketplace.
“Small life insurers are often regional players that serve an important role in their communities, or serve niche markets that are commonly overlooked by larger companies,” said Terence Martin, vice-president at Conning, in a release. “Their ability to survive and thrive can also point to strategies that may be appropriate for companies of any size.”
Conning’s study, Successful Small Life Companies: Remaining Nimble in a Supersized World, analyses small life insurers as a group, and identifies key characteristics of successful small life companies – both strategic and operational. The study identifies ten smaller companies that operate successfully in an environment where big life insurers are growing larger. Three of those ten smaller companies were also listed as a top company in Conning’s original 2004 study, earning them the title of ‘steady high performers’, the study notes.
Significant industry consolidation
During the past decade, the study found, mergers and acquisitions have resulted in significant consolidation in the life insurance industry. In addition, some life insurance companies have purchased blocks of business that have further consolidated specific lines of business, even though these transactions do not change the overall number of companies.
The resulting super-sized companies have the marketing clout and economies of scale to attract a large portion of the life industry’s organic growth.
Small life companies, although still quite numerous, account for a very small portion of life insurance written and in force, and tend to be ignored by industry analysts. Of the 776 companies that reported they collected direct premiums in 2006 of $100,000 or more, 715 posted direct premium income of $500 million or less. Of these 715 companies, Conning eliminated from its study those that do not focus on life and annuity products (less than 75 percent of premiums coming from these lines) and micro insurers (annual premium income of less than $10 million). The remaining 191 insurers formed the basis of Conning’s study.
More than surviving
Given the consolidation of the life insurance industry, one measure of success is simply survival. In that respect, every one of the 191 small companies is successful. Some of these companies are doing more than just surviving, however, and Conning identified ten small companies that appear to be more successful than their peers. These companies have been labelled ‘successful’. The study examined each of the companies individually and as a group to determine which attributes or strategies they have in common that may be leading to their thriving, despite the life industry’s consolidation.
The successful companies tend to be on the larger end of the spectrum, indicating that, even with their smaller size, it may be possible to achieve some economies of scale. The small companies focus on life products, and overwhelmingly on individual rather than group products. Despite this emphasis on individual products, one of the successful companies has predominantly a group product focus, marketing its products to a well-defined niche.
The smaller life insurers also have the largest concentration of companies remaining as mutuals, and they are well represented in the group of successful companies, including one of the steady high performers. Successful small players also expanded their geographic footprint somewhat between 2001 and 2006. While all company categories expanded to some extent, the successful companies increased the number of states/jurisdictions in which they operated by an average of seven markets between 2001 and 2006.
The successful companies also spread their revenue sources to a larger number of states, with one out of every eight moving beyond the ten or fewer states threshold. This expansion illustrates their success in competing on a broad basis, even in the face of an increasingly competitive environment.
Across the entire life insurance industry, scale is becoming a dominant factor, and this is clearly demonstrated in the study’s analysis of premium income. While direct premium for the entire industry increased at a CAGR of 4.4 percent between 2001 and 2006, the industry experienced a significant shift toward the larger companies that were assisted by their advantages of scale, and away from the smaller companies.
All other groups posted decreases, and the smaller companies had the largest decrease of any group. Swimming against this tide, however, the successful companies grew total premiums at a rate significantly greater than the industry average. In general, the results for the successful companies were generated by ordinary life sales rather than annuity sales.
Despite the challenges inherent in being a small player in a rapidly consolidating market, 60 percent of the top ten successful small companies also outperformed average return on assets. In general, the top ten also did a better job than their larger rivals of more aggressively moving their bond maturity profiles to shorter terms between 2003 and 2006 to reflect increases on that end of the yield curve.
Looking across all the successful companies, some common traits begin to emerge. The study concludes that the successful small insurers have a greater focus on ordinary life and annuity; have strong growth of life premium in force; and adjust their investment strategies appropriately. They also place a premium on operating efficiently, having a well-defined niche, and are becoming expert at cross-selling and capturing available economies of scale.
While the odds may be stacked against them, the study shows that a number of smaller US life insurers are doing far more than surviving, thanks to adaptive strategies that allow them to outmanoeuvre the larger players.