Why Homeowners Insurers Are Unprofitable and What to Do About It: Aon

A new report from insurance broker Aon reveals that forward-looking return on equity (ROE) for diversified homeowner insurance carriers fell 100 basis points to 5.0% from last year’s ROE, despite carriers received significant rate increases in 2023/2024.

More than half of the U.S. states reviewed produced negative ROEs for homeowner carriers, with nearly all states producing a carrier ROE below the 10% cost of capital limit after investment earnings.

Aon studied 300 insurance groups representing the total homeowners industry over the past decade. More than 200 were found to fail to make any subscription profit at all. Among insurers that make a profit, about 50 out of 100 profitable insurers fail to make a profit above the 10% ROE limit after adding investment earnings.

The report highlights “continued weak underwriting profit results over the past decade” in the U.S. homeowner line of business. It finds that the last time the industry posted an aggregate underwriting profit was in 2019, when the industry combined ratio was 99. Every year since 2019, the reported industry combined ratio for homeowner businesses has been 105 or worse.

“The headline ROE numbers fail to illustrate the wide range of results achieved by insurers offering policies to homeowners, and we expect insurers to earn weak ROEs insufficient to support the underlying risk,” Paul Eaton, US Actuarial Head of Aon’s Strategy and Technology Group. said.

What to do

Eaton said Aon’s data shows that “both policyholders and insurance carriers need to consider loss mitigation and mitigation tools for the line to find a long-term profitable balance.”

“The lack of consistent returns could discourage the commitment of new capital to homeowner businesses,” the report warns, adding that insurers need to identify sources of capital and quantify that capital’s appetite for different forms of risk.

The poor results resulted from increased losses from secondary hazards such as severe convective storms; the unexpectedly short lifespan of asphalt shingle roofs and their poor wind performance in storms, including severe convective storms; and deductible increases not keeping pace with total insurable value increases, resulting in higher net exposures for carriers.

The study looks at the possibility that some insurance companies use homeowners as a loss leader so that homeowners, combined with auto and other personal lines, are profitable in their entirety. But his analysis finds that this is a losing strategy.

Aon notes that insured losses from storms have increased by 80% over the previous decade, and that 80% of this can be attributed to increased exposures versus a fundamental change in the nature of the risk. Thus, Aon advises, changing the treatment of impairment or deductibles are ways to align incentives that can lower claims and improve insurer profitability.

The report recommends insurers look at “creative approaches” to roof coverage and sharing losses between insureds and insurers. For example, the roof might have a different deductible than the rest of the structure, or homeowners’ insurers might institute co-pays for roofs.

As further exposure increases enter high-risk areas, Aon says insurers should consider analytics to create a robust view of enterprise risk management, understanding hazard at the location level and contributing to existing concentrations before bind a policy, assessing a risk based on historical experience and catastrophe. modeling and including full cost factors in pricing.

The Aon study suggests that at forward-looking rates for 2024 and before income taxes, homeowners insurers keep about one cent of profit for every premium dollar they earn. That direct profit must be shared between the primary carrier, the reinsurance partners and the US Treasury.

The Aon report analyzed statutory and aggregate filing data to estimate the potential return on equity for U.S. homeowner businesses.

Source: Aon – Return on Equity Outlook

TOPICS
Carriers Home Owners Aon