Below is a representation of a model made famous by Boston Consulting Group (BCG) sometime in the late 1980's. This quadrant representation was well designed to tell a story. It was meant to differentiate between products. For example, a soap might have a high market share and a low growth rate (it gets harder to grow quickly the more market share you have), which results in a "Cash Cow". The soap generates a lot of free cash flow, and that cash flow can be used to build Stars. Stars are those rare entities that have a high market share in a market that is booming. Think about online advertising a few years ago. Google had a huge market share, but the market was still growing quickly. They got to double dip in that their free cash flow was high, and their stock was high too because future cash flow would be even higher because the market overall was growing quickly.
What does this have to do with insurance? In insurance, high market share is not a good thing because that results in a concentration of risk and a violation of the law of large numbers. It affects insurance in many ways. The first is that some entities and regulators forget about the fact that insurance should never, ever result in a high market share at the carrier level. Obviously, the politicians thought differently by placing health insurance into a virtual oligopoly, but health insurance is not really insurance (despite what the university professors who typically email me when I write that health insurance is not really insurance, it is not really insurance because the people "insured" are not the people paying the premiums so they are not protecting their own assets. Health insurance is almost exclusively an employee benefit or a government subsidy and often both.).
Another reason to remember this chart is because people forget that banking and insurance are slow growth entities. P&C insurance insures the economy and cannot grow much more quickly than the economy, especially since P&C insurers refuse to insure the knowledge/data economy. All those newly backed entities promising fast growth are either going to give up their profits to grow and still obtain minimal market share (the Dog in the chart) or become the Question Mark/Problem Child because all insurance has low market share. As of year-end 2021, according to A.M. Best, each of the two largest P&C carriers had approximately 9.5% market share on a net written premium basis. The 11th largest carrier (out of approximately 1,000 carriers, not including subsidiaries) has a 1.8% market share. The 90th largest, which is in the top 10%, had a market share of 0.1%.
The P&C industry is unique because by definition, everyone is better off with relatively little market share. However, if you look at the Dogs who have less than 0.1% of the market and are not growing, are those carriers really doing anyone any good? Not really, with the exception of the niche product carriers offering specialized coverages. In that case, market share should be measured differently where they will have an extremely high market share in their niche. The generic tiny, no growth carriers just absorb capacity often at inefficient expense loads. Generic writing P&C carriers are boring and are meant to be boring while providing a decent return on investment with marginal growth associated with safe investments. One way to identify a likely unsafe carrier is if they tout excitement.
Insurance and banking are meant to be boring from this perspective.
An interesting tangent is the distribution angle. Insurance distributors have historically possessed even less individual market share than carriers. One recent estimate is there are 40,000 independent agencies and who knows how many captive agents, let's guess another 40,000. (When I asked Google how many State Farm agents existed, the answer was 18,000 and I got 15,000 for Farmers). That is eight agents per carrier. But agents can be Cash Cows.
One of the characteristics of Cash Cows is that with high market share and low growth, earnings are highly stable and so is the cash flow. Insurance is unique though because customer retention averages around 90% even in tiny agencies (where customer retention is often higher than in large agencies making earnings and cash flow even more stable). Insurance agency earnings/cash flow cannot exist in most industries. Change any part, especially the promise of super-fast growth and the model falls apart. Insurance agencies are not Stars and fast growth does not suit the model. But in other industries, most agencies would be Dogs because they have no material market share and marginal growth which should result in poor, unstable profits.
A question exists on how profits are measured. I have analyzed thousands of agency financial statements including publicly traded broker financials. What follows is not a suggestion that anyone is not following the required accounting rules. However, agencies that have grown organically and then hit the Dog level of no material growth can achieve significant profit margins. That business model works for small, privately owned lifestyle businesses. If the cost of growth is added, i.e., hiring and developing producers, that margin decreases materially.
Private equity and other buyers buy these effectively wasting asset agencies and the accounting rules allow them to harvest profits by not having to count the cost of growth. This combination is a key reason agencies are valued so highly. If the accounting rules were stricter, as many wise people are strongly advocating the accounting rules board to address, agency values would decrease materially because joining a bunch of wasting assets into one entity and not investing to change the culture just results in a bigger wasting asset. Proof is evident in the growth rate of networks and many serial acquirers' premiums at the insurance company level. Premium growth by distributor as measured at the carrier level is an excellent measure of whether the agencies are wasting assets.
The BCG chart above is interesting because it is still a good visual explanation of companies. It was designed for products and strategic business units. The measures are therefore relative to peer groups and quite useful for larger agencies with multiple divisions. For carriers, they should be heavily using something akin to the BCG chart to evaluate their product mix. Doing so might have saved a few regional carriers millions of dollars in their property reinsurance writings had they done this, because carriers cannot legitimately be Cash Cows like agencies.
But my primary purpose in writing this is to remind everyone insurance is supposed to be boring from a growth and market share perspective. Anyone promising differently is likely waving a red warning flag their business model is unlikely to succeed regardless of how long investors fund money losing operations.
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