Big US life insurers have taken full
advantage of their size and the economies of scale it brings to
aggressively increase their market shares. Despite this, many
smaller life insurers have stood their ground and proved themselves
capable of challenging their giant rivals. Charles
Davis
reports

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

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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.

Common traits

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.