For years, insurers were told they could make money in inland marine insurance if they prevented high underwriting expenses from eroding the very favorable combined ratios available in the line.

It appears they were listening.

According to figures from the A.M. Best Co., inland marine has undergone a remarkable transformation over the past 10 years. A line that historically had a higher underwriting expense ratio but lower loss ratio than other lines was reporting lower expense and loss ratios in the 2000s, along with astounding combined ratios.

For 1994, inland marine writers reported a combined loss and LAE ratio of 61.8 and an expense ratio of 38.9, contributing to a combined ratio of 100.8 (which included a 0.1 dividend ratio).

In 2003, the loss and LAE ratios amounted to 51.4, the expense ratio 29.1, and combined ratio 80.7 (again, with a 0.1 dividend ratio). This is no anomaly; the decline was steady over the intervening years, as one can see by consulting Best’s Annual Aggregates and Averages. (Representatives of A.M. Best were invited to comment on the figures, but the company declined, saying that it did not have analysts with detailed knowledge of inland marine insurance.)

Cutting costs

Inland marine experts are surprised by the magnitude of the shift in numbers, but not by the fact that underwriting expenses have fallen.

“Companies have been working hard on expenses,” says Robert Guevara, AAIS vice president for inland marine, who has previously worked as an inland marine underwriter and manager for Fireman’s Fund, Royal Insurance, CNA, and Zurich American.

“Companies have consolidated operations,” he says. “There are fewer offices handling more accounts.”

“There has been a general trend of reducing or eliminating inland marine underwriters at the home office and field office level,” says Bruce Dalrymple, president of Marine Solutions Group, Acworth, Ga. “There has been a gradual shift of small inland marine premiums to package underwriters.”

Consolidated offices and operations are more highly automated than was previously the case in inland marine, says Ron Thornton, president of the Inland Marine Underwriters Association.

“Early on, inland marine was not given the same automation as personal and commercial lines, but now it has come up to that level,” Thornton says. From initial data entry through policy issuance, Thornton says there are a reduced number of “touches” in the underwriting process.

“Some of the efficiency gains made in the past few years are showing up in the expense column,” says Edward Helfers, vice president and underwriting executive for Fireman’s Fund McGee Marine Underwriters, New York City.

“Increased use of electronic methods have improved inland marine service,” Helfers says. “Online motor truck cargo filings, quoting, and policy issuance are just a few examples of what has taken place in inland marine insurance.”

“As a result, there’s been growth in premium but not a corresponding growth in staff,” says Thornton of the IMUA.

Is this all good?

If the A.M. Best numbers reflect a permanent trend, inland marine could start attracting a lot more attention from and within companies.

Inland marine operations were once characterized by their unique function and status within a company.

“I’ve always known that inland marine expenses were higher,” says Richard Pye, vice president for inland marine at CNA. “I attributed this to loss control expense against smaller premiums, higher salaries for inland marine specialist underwriters, increased travel for those underwriters, and higher commission rates as incentives to write business.”

The reduction in expenses would not be a good thing, Pye says, if it means that inland marine coverage is getting less attention from package underwriters than it traditionally has from specialists, and if loss control is being shortchanged to save expenses.

While acknowledging that inland marine carriers have cut operating costs, Thornton cautions observers not to read too much into the figures.

Reductions in commissions and brokerage may reflect, in part, a small but growing trend to quote large accounts net of commission, wherein a producer’s compensation comes from the insured in a fee agreement between a producer and an insured, according to Thornton.

Also, he adds, inland marine experience is now being included in profit-sharing agreements between producers and carriers to a degree not seen previously. Hence, there may be some compensation expense that is not being reported as such.

Finally, he notes, there is still a lot of “lazy” data reporting in inland marine that one must acknowledge when evaluating any figures for the line.

Nonetheless, the proverbial “bottom line” has become so good in inland marine that longtime inland marine writers have something new to worry about.