Study Says Life Insurers' Overhead Expenses Spurted in 2001

Hunt notes that Millimans analysis, which is based on figures released by insurers to state regulators, does not always clearly point to reasons for changes for year to year.

"We dont have enough information from the public data to see which specific expenses have increased," she explains.

For that reason, the causes of the differences between stock and mutual companies are unclear, says Hunt.

She adds, however, that much of the difference may actually be due to the recent trend for mutual companies to go public.

"Demutualization is an expensive process," she notes. "Theres a lot of consulting work and a lot of data-gathering involved," all of which drive up their expenses in the period immediately before demutualization, she says.

One observer says he suspects a possible conclusion from the data is that stock companies are more efficient than mutuals because they have to answer to shareholders.

"I would think stock companies are more in tune to watch expenses, vs. traditional mutual companies, where management only has to answer to itself," says Peter M. Wilson, president of Mystic Insurance Intermediaries, Hartland, Wis.

Other experts think different factors may be at work.

Julie Burke, managing director, Fitch Rating Service Inc., Chicago, says a likely reason for the disparity was the holding company structure of many stock companies, which is seldom used by mutual insurers.

"Often, [stock company] expenses are assigned to the holding company, but for mutuals, all costs are absorbed at the parent company level," Burke says.

"Its hard to determine what might be the true discrepancy" between the two types of companies, says Cynthia Saccocia, senior analyst, TowerGroup Inc., Needham, Mass. "It could be a couple of things–for example, the costs associated with servicing their different kinds of customers. In addition, stock companies had to forge ahead and reduce operating costs to address needs of Wall Street. Mutual companies dont have the same pressures."

Another issue may be mutual companies imposing stricter underwriting rules, says Saccocia.

"Mutual companies need to provide value for policyholders and traditionally are more conservative in pricing and underwriting risk."

Then, too, she adds, perhaps stock companies tend to focus less on insurance because they usually offer a variety of other financial products. "If we look at firms that have demutualized, they have done so to become more diversified," she says.

Thomas Upton, an insurance company analyst with Standard and Poors, New York, points out, too, that some expenses that mutuals classify as operating expenses are classified as commissions by stock companies.

Hunt says many of the companies Milliman categorized as mutual insurers have since demutualized. For consistency of data, Milliman includes in its mutual company data any firms that demutualized after 1995.

Millimans own analysis found that when data from the three largest mutual insurers are left out the study, the differences between the two types of companies are reduced.

With the top three mutuals excluded, the weighted average expense ratio for all large life companies was 8.9% and 11.8% for large mutuals.

Looking at just the 20 largest companies, the expense ratio average was 12.6%, compared to 8.4% for the same group without the three largest mutuals, Milliman says.

Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.