Why Homeowners Insurers Are Unprofitable and What to Do About It: Aon
A new report from insurance broker Aon reveals that the prospective return on equity (ROE) for diversified homeowners insurance carriers decreased by 100 basis points to 5.0% from last year’s ROE, despite carriers receiving significant rate increases in 2023/2024.
More than half the U.S. states under review produced negative ROEs for homeowners carriers, with nearly all states producing a carrier ROE below the 10% cost of capital hurdle after investment gains.
Aon studied 300 insurance groups that represent the aggregate homeowners industry over the last decade. It found that more than 200 fail to earn an underwriting profit at all. Of the insurers that do earn a profit, about 50 of the 100 profitable insurers fail to earn a profit above the 10% ROE hurdle after adding investment gains.
The report highlights the “continued poor underwriting profit results over the past decade” across the U.S. homeowners line of business. It finds that the last time the industry posted an aggregate underwriting profit was 2019 when the industry combined ratio was 99. Every year since 2019, the reported industry combined ratio for homeowners business was 105 or worse.
“The headline ROE numbers fail to illustrate the wide range of outcomes realized by insurers offering homeowners policies, and we expect insurers will earn meager ROEs insufficient to support the underlying risk,” Paul Eaton, head of US Actuarial of Aon’s Strategy and Technology Group, said.
What to Do
Eaton said Aon’s data show that “both policyholders and insurance carriers need to consider tools for loss mitigation and reduction for the line to find a long term profitable equilibrium.”
“The lack of consistent returns could deter the commitment of new capital to homeowners business,” the report warns, adding that insurers need to identify sources of capital, and quantify the appetite of that capital for various forms of risk.
The poor results have resulted from increased losses from secondary perils such as severe convective storms; the unexpectedly lower lifespan of asphalt shingle roofs and their poor wind performance in windstorms including severe convective storm events; and deductible increases not keeping pace with total insurable value increases leading to greater net exposures for carriers.
The study looks at the possibility that some insurers may be using homeowners as a loss leader so that homeowners combined with auto, and other personal lines, is profitable in its entirety. But Aon’s analysis finds this is a losing strategy.
Aon notes that insured loss from thunderstorms has increased 80% from the previous decade and that 80% of this can be attributed to exposures growth versus a fundamental change in the nature of the risk. Thus, Aon advises, altering the treatment of depreciation or deductibles are ways to align incentives that may decrease claims and improve insurer profitability.
The report recommends insurers look into “creative approaches” to roof coverage and loss sharing between policyholders and insurers. For example, the roof could have a different deductible than the rest of the structure or homeowner insurers could institute copays for roofs.
As further exposure growth enters high hazard areas, Aon says that insurers should consider analyses to create a robust view of enterprise risk management, understanding location-level hazard and contribution to existing concentrations before binding a policy, evaluating a risk based on historical experience and catastrophe modeling, and incorporating the full cost drivers into pricing.
The Aon study suggests that, at prospective 2024 rates and before income taxes, homeowners insurers keep about one cent of profit for every premium dollar they earn. That direct profit must be shared between the primary carrier, reinsurance partners and the U.S. Treasury.
The Aon report analyzed state and aggregate statutory filing data to estimate the prospective return on equity for U.S. homeowners business.