Returns for U.S. homeowners insurers set to rise: Aon Benfield

Prospective returns for homeowners insurers in the United States continue to improve, according to Aon Benfield’s 2015 Homeowners ROE Outlook report, released on Tuesday.

The report from Aon Benfield – the global reinsurance intermediary and capital advisor for Aon plc – reveals that insurers’ prospective after-tax return-on-equity (ROE) for U.S. homeowners insurance business is 8.6% on a countrywide average, and 12.6% excluding the state of Florida, both of which are a 70 basis point improvement over last year. [click image below to enlarge]

The study also showed that 36 states expected a return exceeding 10%, enabling carriers to cover their cost of capital.

Aon Benfield said in a statement that 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; and 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, Aon Benfield said in the statement.

According to the report, rate increases averaged 4% 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. The lack of a major hurricane landfall in the US has resulted in favourable reported loss ratios in many coastal states, including Florida, the report added.

“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, in the statement. “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 that Aon Benfield’s 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.