Direct US homeowner insurance tipped to keep growing

The prospective after-tax return-on-equity (ROE) for US homeowners business was 6.7 percent on a countrywide average and 10.9 percent excluding the state of Florida, according to the report.

However, these figures showed a fall from the ROE of the previous year, with the countrywide figure for 2015 being 8.6 percent and the 2015 Florida figure being 12.6 percent.

Aon said that this fall in ROE was down to a number of headwinds, which included a slowdown of rate increases along with expense ratio noise worth 50 basis points (bps) on the combined ratio.

An increase in the estimated catastrophe loss ratio resulting from updates to the vendor catastrophe models used in the study that hurt the combined ratio by 170bps and changes in assumed yield (down 40bps) also contributed to the fall in ROE.

Declining costs of reinsurance to capitalise the volatility inherent in the homeowner line buoyed profitability somewhat against the ROE headwinds.

Softening reinsurance costs have cumulatively added over 200bps of ROE in Aon’s study since 2013 and the broker said that it remains to be seen where reinsurance pricing will bottom out.

Looking at 2016, Aon’s report said that ROEs are expected to exceed 10 percent in 34 US states, enabling carriers to cover their cost of capital, compared to 36 states in 2015.

It claimed that homeowner insurers secured an average rate increase of 2 percent during the 18 months to August 2016, with rate decreases experienced in Florida, Arizona, Indiana, Ohio, Alabama, and Alaska.

The report also said that one bright spot accretive to homeowner insurance profitability is the continued contraction of reinsurance pricing.

According to Aon, the heavy exposure of homeowners to catastrophic perils including hurricanes, tornadoes, hail, and winter freeze events makes the line capital intensive to write.

Greg Heerde, head of Americas analytics for Aon Benfield, said: “Our study reveals that at prospective 2017 rates, homeowner insurance provides accretive returns in the majority of states, and opportunities exist for insurers to pursue profitable growth in the line.”

Parr Schoolman, head of Aon Benfield’s risk and capital strategy team, added: “We are continuing to develop tools and services to help provide clients with insight, at a granular level, into which homeowners’ risks are most likely to be profitable.”

Aon explained that reinsurance capital is available at “aggressive pricing” and provides savvy carriers with flexibility in “managing growth options within profitable footprints while maintaining net risk positions”.

“Persistently low investment yields complicate the picture for carriers because of a lack of meaningful alternatives to bolster underwriting profitability,” added the report.