After four years of sub-100 combined ratios for the U.S. homeowners insurers, the segment saw its combined ratio deteriorate to 107.1 in 2017 as a result of numerous catastrophes, according to an A.M. Best report.
The new Best’s Market Segment Report, titled, “Homeowners Insurers Endured Major 2017 Catastrophes,” notes that the 2017 combined ratio was just above the 25-year median of 106.9. Results from 2013-2016 benefitted from benign catastrophe activity, as well as favorable reinsurance pricing, terms and conditions and improvements in underwriting analytics.
Despite the numerous catastrophes in 2017, the majority of U.S. homeowners insurers were able to absorb the losses due to healthy levels of capitalization, according to the analysis.
The favorable reinsurance environment kept 2017 from becoming even worse year for primary homeowners insurers. A large proportion of losses were within these companies’ retentions. The 2017 accident-year ceded loss & loss adjustment expense (LAE) ratio of 93.5 was the third highest of the past 20 years, but the net loss & LAE ratio of 79.3 was just the sixth highest.
“U.S. personal lines insurers have been pressured to improve the profitability of their homeowners books to balance the worsening results and increasing competition in the personal auto segment. Homeowners insurers have continued to invest in and utilize technology to improve their underwriting and pricing tool set,” A.M. Best said.
The report says that predictive modeling has allowed for more sophisticated and accurate risk classification, segmentation and pricing, and by-peril pricing has become the standard for the segment. This more granular pricing has improved rate adequacy and enabled insurers to purchase reinsurance more effectively and efficiently, according to the analysts.
“Although implementation costs can be prohibitive due to the large number of statistically significant rating variables the availability of third-party data has allowed more companies to implement by-peril pricing and its use by companies has steadily increased. Those companies late to embrace these technology initiatives are likely to be adversely selected against or risk losing market share,” the report adds.
While 2017 was a clear outlier in terms of the number of major catastrophes, ongoing underwriting discipline, pricing sophistication and continued risk management initiatives remain critical for this segment’s future profitability, A.M. Best said.
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