AM Best Revises US Homeowners Insurance Segment to Negative as Losses Persist

September 18, 2023

The U.S. homeowners insurance segment has been hit with three consecutive years of net underwriting losses as a result of above-average numbers of natural catastrophes, inflationary pressures and elevated reinsurance costs. These market headwinds have led AM Best to revise its outlook on the segment to negative from stable.

Segment carriers are being challenged “by more frequent secondary weather perils and higher retentions and co-participation, given reinsurance pricing trends,” according to the report titled “Market Segment Outlook: US Homeowners.”

“Rising loss costs, inflation and supply chain disruptions are pressuring earnings, making it difficult to maintain rate adequacy,” which has led several market leaders to curtail new business in catastrophe-exposed states, the report said.

“Going forward, homeowners carriers will find it difficult to absorb these underwriting pressures while strengthening their balance sheets. A return to underwriting profitability over the near term appears highly unlikely,” said Maurice Thomas, senior financial analyst, AM Best, in a statement accompanying the report.

Risk-Adjusted Capitalization Still Solid

Despite the operational challenges that homeowners’ carriers face, AM Best said, overall risk-adjusted capitalization remains solid for most companies due to their risk management best practices to protect their balance sheets. “Companies remain vigilant is assessing their rate needs, pushing for increases where pricing is inadequate.”

Related: AM Best Revises Outlook for Georgia Farm Bureau Companies

However, AM Best noted that the capital cushion for some insurers – especially those in catastrophe-exposed areas – has started to erode following persistent underwriting losses in recent years.

“With companies increasing their reinsurance retention and co-participation levels because of reinsurance market conditions, cat activity is having a larger negative impact on results.”

Accelerated Technology Adoption

On a more positive note, AM Best said, technology adoption is accelerating, which is accompanied by improved catastrophe risk management practices.

“In light of the evolving risk environment, insurers have accelerated their shift to digital technology and intensified their focus on product innovation,” the report said, explaining that the homeowners line deals with large homogeneous risks, so initiatives can be scaled and replicated relatively easy.

“Pricing sophistication has helped carriers in their pursuit of rate adequacy. By leveraging proprietary underwriting models and technology platforms, top performers have been able to customize coverage for the right price,” AM Best continued.

“New technologies can strengthen risk selection and mitigation, enhance claims processing, lower expense and service costs, and improve product offerings.”

By maintaining their focus on rate adequacy, technology adoption and catastrophe risk management, carriers in the homeowners segment may find more earnings stability going forward, AM Best indicated.

Photograph: In this Aug. 27, 2020 file photo, buildings and homes are flooded in the aftermath of Hurricane Laura near Lake Charles, La. (AP Photo/David J. Phillip, File)