Aon Benfield Homeowners' ROE Outlook Growth. Divergent Markets. Technological Innovation. October 7
Homeowners: Growth. Divergent Markets. Technological Innovation. The estimated prospective ROE for homeowners this year is. percent, down from.7 percent in. There are three key themes to note about homeowners insurance in 7: Growth The homeowners line of business continues to grow; premiums have increased to USD9 billion in from USD billion in. The rate of growth has slowed from prior years and slower growth is expected in the near future with less aggressive but positive rate change in the pipeline. Further, catastrophe losses are rising faster than inflation and coverage gaps continue in perils, like flood, suggesting opportunities exist for carriers to find premium through coverage innovations. Divergent Markets From the macroscopic perspective of this study, there are at least three different homeowners markets:. Florida, a market unto itself. Eight of its ten largest carriers have limited name recognition outside the Florida market, though several are expanding to other coastal states. Remove Florida and US ROE increases to 9. percent, suggesting the assumptions of this study (nationwide carrier with A.M. Best A rating) differ from market reality in the sunshine state.. The hurricane exposed coast, excluding Florida. Hurricane coast states posted an ROE of.7 percent in this year s study. At present, these states are characterized by heavy regulation, strong competition between established brands vs. younger carriers, and sophisticated risk differentiation based on granular catastrophe-savvy rating plans.. Everybody else. The remainder of the US owns a respectable. percent ROE with market share largely dominated by big-name national and superregional brands. Regulatory considerations are easier to navigate than in coastal states. Catastrophe risk has unique challenges associated with less robust models for thunderstorm, wildfire, and flash flood risks compared to hurricane. California and Washington are unique due to their strict regulatory environment, but otherwise resemble the other states in the cohort in terms of perils and players of note in part because earthquake endorsements are not required for home loans, show limited take-up, and are ultimately excluded from this analysis because they roll up to the earthquake annual statement line. Technology This year s study examines one dollar of homeowners premium, which highlights 8 cents of loss adjustment and cents of policy acquisition costs ( cents for commissions and brokerage plus 9 cents for other acquisition costs). These areas of the value chain are coming under attack from InsurTech startups eager to test established carriers ability to adapt rapidly evolving technology. Aon s Digital Monitor currently tracks over forty startups backed by nearly USD billion in venture capital attacking these areas of the property and casualty value chain (not all in homeowners specifically). Mobile and software-as-a-service platforms, drone and satellite imagery, and proprietary catastrophe-detection internet-of-things enabled hardware promise to continue to apply pressure to traditional homeowners carriers approach to the business of insurance. To learn more about the impact of technological innovation in the insurance sector, view the 7 Global Insurance Market Opportunities study at http://aon.io/gimo-7. Contacts Paul Eaton paul.eaton@aonbenfield.com Parr Schoolman parr.schoolman@aonbenfield.com Robert Fox robert.fox@aonbenfield.com Homeowners ROE Outlook 7
August 7 prospective ROE at current rates Prospective ROE percent Countrywide ROE estimate:.% Less than to to 7 to 9 and above ROE study methodology The basis of the prospective ROE estimate is industry state and aggregate statutory filing data including reported direct losses, expenses, payout pattern, and investment yields. We replace actual historical catastrophe losses as measured by Property Claims Services with a multi-model view of expected catastrophe loss. On-leveling of direct premiums to current rates uses rate filings of the top insurance company groups by state. Finally, estimated capital requirements and reinsurance costs consider a nationwide personal lines company writing both Home and Auto business at a capitalization level consistent with an A.M. Best A rating. The ROE estimates exclude earthquake shake losses, as the premium and losses for that coverage are recorded on a separate statutory line of business. Change in prospective ROE from previous year % 8% % % % %.7% prospective ROE -.% Attritional & catastrophe loss changes -.% Increased expenses -.% Volatility & capital costs +.% 7 prospective ROE The diversification available to a nationwide personal lines insurer impacts the ROE calculation. For instance, Homeowners business in California diversifies Gulf and East Coast hurricane exposure for a nationwide insurer. A California standalone would incur higher capital and reinsurance costs than the California portion of a nationwide insurer with similar premium volume in the state. Similar results are to be expected for any other regional or single state insurer. The normalization of catastrophe by this study replaces the local impacts from large events like Harvey, Irma, or the first and second quarter hail and wind losses experienced in 7 with the modeled catastrophe average annual loss. The prospective impact to the line from these events remains to be seen and future versions of this study may attempt to measure impacts to rate level and reinsurance pricing. The 7 nationwide ROE estimate of. percent falls below our estimate of.7 percent. Profitability challenges to the line include () a slowdown of rate increases (and decreases by some major carriers) that failed to pace loss and expense inflation and () premium and exposure growth that pushed up the A.M. Best capital requirements to maintain the assumed A rating. Declining costs of reinsurance to capitalize the volatility inherent in the homeowners line were insufficient to offset the increased capital charges. Softening reinsurance costs cumulatively added over bps of ROE in our study since ; after the catastrophe losses of 7, the reinsurance and capital markets will be closely watched for pricing signals. Homeowners ROE Outlook 7
Ten year Property Claim Services loss experience vs. modeled average annual loss - Countrywide: -% - - - - - - - - - - - - - - - - - - - Loss ratio points Less than - - to - to to 9 and above Five year Property Claim Services loss experience vs. modeled average annual loss The maps left and below show, in loss ratio points, the amount that catastrophe experience exceeds model average annual loss. Adjusting combined ratios for expected versus historical catastrophe loss is an important step to distinguish weather-related randomness from inadequately priced business. Historical catastrophes can distort measures of results at a state level, causing the noise to overwhelm the signal. While state level adjustments can be significant, the ten year nationwide experience catastrophe loss ratio of points is meaningfully lower than the modeled expected catastrophe loss ratio of percent. ended the dearth of hurricane activity that was the boon of gulf coast carriers for nearly ten years. The gulf states plus Florida had points of favorable results relative to expected from 7 through, and as of the time of this publication, even with Harvey and Irma, that favorable experience is more than points of performance lift. - - Countrywide: -% - - 8 - - - - - - - - - - - - - - - - - -7 - - - - - - - Loss ratio points Less than - - to - to to 9 and above The five year retrospective comparing catastrophe experience to modeled expectation is favorable for much of the country. States on the eastern slopes of the Rockies into the plains, including Colorado, Nebraska, and Montana, experienced pain primarily from hail driven losses in several of the last five years. Texas is an interesting case study because the lull in hurricane activity drives overall favorable experience overwhelming thunderstorm losses that contributed to a five point drag on the loss ratio. The five year averages reflect the period to. Across the country, the first two quarters of 7 experienced the highest thunderstorm loss levels since and the third quarter included multiple major landfalling hurricanes. Taken together, this should partially erode the favorable experience of the previous five years. Direct combined ratio to achieve a percent return on allocated capital Countrywide combined ratio: 9% 8 9 9 9 8 9 9 9 9 88 Combined ratios Less than 8 8 to 8 8 to 9 to 9 and above The percentages in the map on the left show the direct target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and noncatastrophe risk. The targets are for a sample of nationwide companies only and will vary among individual companies because of state distribution of premiums, capital adequacy standards, target return on capital, allocation methodologies, reinsurance, and other considerations. For a diversified insurer with a footprint similar to the industry, the target combined ratios fall into three main categories: () Florida, () other hurricane exposed states, and () states not materially exposed to hurricanes.
Homeowners average approved rate change Countrywide: % - - * 7 7 Approved rate change Less than to to to and above *Rate filings not available The map on the left shows average approved rate changes filed between January and August 7 for the top homeowners groups by state that made a filing in the period. Rate activity, while still positive, continues the slowdown observed in last year s study. Notable decreases came from at least one large industry carrier suggesting potential divergence in pricing levels that the averages fail to reflect. Rate changes on the coast, including Florida and Texas, ticked up significantly versus observations from last year. For Florida in particular, rate activity was likely insufficient to on-level for assignment of benefits and claims adjustment issues facing the state s carriers. Premium growth and rate change, to 7 Direct written premium ($bn) Rate level index ( =.) Average rate change (%) 7.. 7 7.. 77.8. 8 8.. 8..8.. 9. 9.9..7 7 Homeowners as a growth engine continues to be the headline for the insurance industry through as the line has outpaced GDP and most other underwriting segments since. Direct written premiums increased from USD7 billion in to USD9 billion in with a projected USD9 billion for 7 given prospective rate activity. A strong component of growth through was an emphasis on rate adequacy with indicated rate levels increasing over percent since. Policyholders changing carriers will prevent the industry from realizing the full aggregate benefit of the individual carriers rate actions. The S shape of the rate change curve suggests the line should be watched carefully. The rate activity through is now fully earned and rates since show more modest increases. Time will tell if rate increases around two percent will suffice to track loss and expense inflationary pressures. One dollar of homeowners premium Attritional loss 7 Catastrophe loss LAE 8 Policy acquisition G&A TLFs Profit Our study suggests that, at prospective 8 rates and before income taxes, insurers keep slightly more than four cents of profit for every premium dollar they earn. The four cents of direct profit is shared between the primary carrier, reinsurance partners, and the US Treasury. Aon Benfield
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