INSURANCE

INSIGHT
2008-1

UNDERSTANDING YOUR COMPETITIVE ENVIRONMENT

By Mark J. Ellsworth, CPA

As insurance markets become softer, competition becomes

more fierce and companies and their managers are seeking to develop an edge over rival companies.

lower prices. In a hard-market cycle, insurers capacity is

more limited making it more difficult for customers to
gain price concessions or broader coverages.

In Michael Porters classic work, Competitive Strategy1, he

introduced the Five Forces Model for analyzing the competitive environment and describes five forces that drive
competition:

Supplier Power
In the insurance industry, reinsurers are the most significant supplier to primary insurance companies. Insurers
need access to reinsurance in order to profitably write business. In a hard market, reinsurers are generally in a position to control both the prices they charge and the capacity they provide. After the terrible catastrophe of
September 11, 2001, reinsurers implemented significant
price increases to offset losses and declining investment
returns. The price increases restricted the amount of coverage that the primary insurance companies could provide
to their customers.

1.
2.
3.
4.
5.

Degree of rivalry;
Threat of substitute products or services;
Buyer power;
Supplier power; and
Barriers to entry.

Analysis of Porters model can serve to help insurance

company managers and directors better understand their
companys competitive position and help determine strategies that will best serve the company.
Degree of Rivalry
Rivalry among insurance companies is intense which is
described as an undisciplined market. Since collusion is
illegal and the industry is highly regulated, competitive
moves in low-rivalry industries like insurance must be
restrained informally. However, an aggressive company
seeking to gain an advantage can disrupt an otherwise disciplined market by lowering prices, improving product features, or using innovative distribution channels such as the
internet.
Threat of Substitute Products or Services
Currently, the threat of substitute products or services is
not a significant factor in the insurance industry. If future
legislative changes were to require customers to purchase
insurance from government-sponsored entities, it could
pose a threat of substitution for traditional insurance coverages.
Buyer Power
In a soft-market cycle there is generally excess capacity
and many insurers competing for the customers business.
Buyers are in position to demand broader coverages and

In this
Issue

Understanding Your Competitive

Environment
Did You Know

Barriers to Entry
Some companies create barriers to market entry by offering unique or customized insurance products and services
to their customers, whereas, other companies build competitive advantage on efficient and prompt claims service.
A long-term and mutually beneficial relationship with a
group of producers can provide a competitive advantage.
The barriers to entry into the insurance business are relatively low and are primarily restricted to the financial
investment required to meet regulatory minimum capital
requirements.
In summary, one can expect a high level of competition in
an industry that has many companies, little differentiation
among products and services, and high exit costs. All of
these factors are present in the insurance industry making it an extremely competitive market. The challenge is
to identify and leverage any competitive advantage an
insurance company may possess. If a company is unable to
gain a competitive advantage, it is left with few options
other than to compete on price.
See Michael E. Porter Competitive Advantage: Creating and
Sustaining Superior Performance, New York: The Free Press,
1985.
1

Staff News

Did You Know

Payroll Check Mailing Law - Iowa employers, did
you know that effective July 1, 2008, you may
no longer mail a paycheck without prior written
authorization from the employee? Mailing checks
to employees is no longer allowed without having a
signed authorization form on file prior to mailing
the paychecks. However, it is still permissable to
mail paystubs or pay summaries to employees. s.

Mileage Rate Increase - In response to higher gasoline prices, the Internal Revenue Service has
announced an increase in the Standard Federal
Mileage rate for the last half of 2008. Effective July
1, 2008, the mileage rate for business miles is 58.5
cents. This represents an 8 cent increase from the
rate effective for business miles driven between
January 1 and June 30, 2008.

The purpose of the law is to ensure that employees

receive their paychecks in a timely fashion.
According to the Iowa Workforce Divison of Labor
Services, an employer may also be held liabile for
bank overdraft charges that are assessed an
employee if the employer fails to pay an employee's
wages on or by a regularly scheduled payday.

CECO Anniversary - In July 2008, Cain Ellsworth

& Co. celebrated 40 years in business. Thank you
to all of our clients and friends for making our success possible. We appreciate the confidence and
trust you place in us. It has truly been a pleasure to
serve you!

If you have questions, please give Jo Hindt a call at (712)

324-4614 or email her at jkh@cainellsworth.com.

STAFF NEWS
Mark J. Ellsworth, CPA, has completed the requirements for the Associate
in Reinsurance (ARe) diploma program sponsored by the American
Institute for CPCU and Insurance Institute of America. We feel confident
that the knowledge Mark has gained through his advanced education will
help us to better serve our clients in the insurance industry.
Congratulations, Mark!
We would like to introduce Ranae Scholten. Ranae is a junior accountant
at Cain Ellsworth & Co and has just completed her first year with the firm.
Ranae works with the insurance team providing assurance services and
investment accounting. Ranae lives in Sheldon, Iowa, and in her spare
time enjoys bowling and traveling.
We are excited to have Ranae as a part of the CECO team!

Cain Ellsworth & Co., LLP

1008 Third Avenue
PO Box 449
Sheldon, Iowa 51201
PHONE: 712.324.4614
FAX: 712.324.4617
www.cainellsworth.com