Returns set to rise for U.S. homeowners insurers, according to annual Aon study
The report reveals that insurers' prospective after-tax return-on-equity (ROE) for U.S. homeowners insurance business is 8.6 percent on a countrywide average, and 12.6 percent excluding the state of Florida, both of which are a 70 basis point improvement over last year. Furthermore, the study reveals 36 states where the expected return will exceed 10 percent, enabling carriers to cover their cost of capital.
The general improvement in the prospective ROE for 2015 has been driven by three key factors:
- Improved prospective rate levels in primary insurance rates;
- A decline in the estimated catastrophe loss ratio, resulting from updates to the vendor catastrophe models used in the study;
- The decreasing cost of reinsurance, utilized by insurers to mitigate the volatility inherent in the homeowners line.
These positive trends are partially offset by an estimated 20 basis point average decrease in homeowners insurers' investment yields.
According to the report, rate increases averaged 4.0 percent in U.S. homeowners lines during the 18 months to August 2015. However, in Florida rate decreases are offsetting the positive effects of reduced reinsurance costs, limiting the improvement in the prospective ROE outlook for the state.
Greg Heerde, Head of Aon Benfield Analytics Americas, said: "The footprint of profitable growth opportunities continues to expand for the homeowners line of business, with positive rate momentum being maintained. We continue to see increased utilization of risk-adjusted pricing methods and the development of by-peril rating plans."
Parr Schoolman, Head of Aon Benfield Risk and Capital Strategy Group, added: "Our tools provide clients a granular breakdown of all their costs of catastrophe risk, which can be directly incorporated into rate filings and underwriting processes."
Developed by Aon Benfield Analytics and updated annually, the Homeowners ROE Outlook report provides a comprehensive analysis of the U.S. homeowners insurance sector, based on industry aggregate state level statutory financial filing information along with rate filings and supporting actuarial information for the 20 top U.S. homeowners insurance groups by state.