Underwriting Discipline Needed to Restore Profitability to Homeowners Market

September 18, 2003

Insurers must be more disciplined in their underwriting and pricing, or they will continue to face unacceptable losses in the homeowners insurance market. That was the advice from a panel of experts at the Annual Underwriting Conference this week in Orlando. The Alliance of American Insurers and the American Association of Insurance Services (AAIS) organized the conference.

Noting that the industry has paid out $1.16 in losses for every dollar collected in premium for homeowners policies over the past 13 years, consultant Richard Dorman urged underwriters to look not just at the house, but also at the homeowner when assessing the risk.

“We can do a better job of pricing using an underwriting approach that has been ignored ¾ by putting the ‘who’ in homeowners,” said Dorman. “‘Who lives there?’ is very important. Homeowners losses are, to a certain extent, and sometimes to a great extent, under the control of the insured.”

Dorman said underwriters focus on the age of the house, the type of construction and its condition, but none of the variables looks at who lives in the house. He compared it to looking at auto insurance based solely on the vehicle and not the driver.

“Sex, marital status, age, number of kids, occupation and credit score ¾ you need to ask these questions,” he said. Dorman said credit-based insurance scores have proven to be a highly relevant factor because they measure personal responsibility. “If you keep your financial house in order, you’ll also be in a good position to keep your real house in order by taking care of the property and keeping up on the repairs. Credit is the first and only time we’ve looked at ‘who.’ It’s our first ‘who’ variable, and it’s huge.”

Jeffrey Sciaudone, director of engineering at the Institute for Business & Home Safety (IBHS), said his organization is gathering data on specific causes of loss in the homeowners market in an effort to eliminate some of those problems.

“Don’t just tell me the cause of loss was water,” he said. “I want to know was it the refrigerator icemaker, was it the dishwasher, was it the sink in the kitchen, was it the bathtub?”

While many insurers have sought rate increases to stem the bleeding, not everyone is convinced the industry is painting an honest picture, said Rita Nowak, assistant vice president of property casualty for the Alliance.

“Many of our regulators and legislators believe that the rising costs of homeowners insurance is due to the insurance industry’s quest, or lust, for restoring profitability.

“They are looking at restraints on CLUE and credit scores, coverage mandates and more regulation of rates, and the trend is not going to change next year.”

Nowak noted that over 100 bills, aimed at restricting or banning the use of insurance scores, were introduced this year. She said 19 states have enacted legislation so far this year, with 13 of those states adopting the NCOIL model that still allows insurers to use insurance scores.

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