Outlook for Homeowners Insurance Market Improves: Report

The outlook for the U.S. homeowners market has improved over last year thanks in part to rate increases and lower reinsurance costs, according to reinsurance intermediary Aon Benfield.

A new report by Aon Benfield Analytics reveals that insurers’ expected 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.

In its 2015 Homeowners ROE Outlook report, Aon identifies 36 states where the expected return will exceed 10 percent, enabling carriers to cover their cost of capital. The 36 states projected to have ROE in excess of 10 percent include all in the Northeast, Mid-Atlantic, West and most in the Midwest. Minnesota, Texas and North Carolina are projected to have a low ROE, from 0 to 3 percent, while several Midwest states are projected to return from 4 to 6 percent. The Southeast poses the biggest challenge for home insurers, with Florida, Georgia, Alabama and Mississippi expected to have returns below 10 percent. Florida’s expected return is less than 0.

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.

As overall rate levels improve, the focus is shifting to increased sophistication in risk segmentation, according to the report.

“The footprint of profitable growth opportunities continues to expand for the homeowners line of business, with positive rate momentum being maintained,” said Greg Heerde, head of Aon Benfield Analytics Americas. “We continue to see increased utilization of risk-adjusted pricing methods and the development of by-peril rating plans.”

Updated annually, the report is based on industry aggregate state level statutory financial filing data including reported direct losses, expenses, payout pattern, and investment yield for the 20 top U.S. homeowners insurance groups by state.