What’s Not Changing in 2025: Homeowners Outlook, Re Retentions

When analysts at AM Best reviewed outlooks for the property/casualty insurance and reinsurance sectors this week, recent good news of a change in outlook for personal lines—and for personal auto insurance—were the first highlights.

But a cloud remains over one piece of the personal lines pie. The outlook for homeowners insurance remains negative, said Richard Attanasio, senior director–Personal Property/Casualty, during a webinar briefing on the main segments of the insurance industry.

“Challenges remain, and the biggest challenge is the volatility in weather and results,” Attanasio said after listing a half-dozen factors, mainly boosting personal auto results, that allowed AM Best to switch the personal lines outlook from negative to stable.

The personal auto and personal lines outlooks are “very closely connected because personal auto accounts for more than 50 percent of the premium in the personal lines space.” But with homeowners accounting for much of the remainder, the personal lines outlook is not positive.

More granular pricing, a more accommodating regulatory environment and accelerated technology adoption all helped personal auto insurers get back on track, he said, listing only one positive for homeowners insurance: “improved catastrophe management practices.” But that didn’t move the needle enough to merit a stable outlook for the line.

Instead, headwinds like “continued heightened severe weather activity” and “higher overall [reinsurance] retentions and co-participations on property lines” continue to drive higher net losses for primary companies, Attanasio said.

“That’s really been the issue for a lot of companies, particularly ones that are small or very concentrated. Having those multiple events and being able to manage through them consistently has been a challenge, and that [still] seems to be the case now,” he said of hurricanes, severe convective storms and wildfires.

Comparing reinsurance pricing and terms now to the prior two years, Attanasio said, “It’s certainly not as chaotic as it was. There’s been rumblings that potentially there will be some softening…But if it were to be, we don’t think it would be very material, again because companies are having to retain more,” either through higher retention wise or bigger co-participation percentages. “Those two things just make higher losses for them to face,” he said. “And aggregate reinsurance—to be able to absorb those multiple events, that’s just has not been available,” he said, again alluding to “some indications that perhaps it might be going forward.”

“But we’ll have to see what the details are in terms of the level of protection and obviously the cost that would be associated with it,” he said.

Carlos Wong-Fupuy, senior director–Global Reinsurance, said reinsurers are unlikely to loosen up on the tighter terms and conditions on property contracts that were put in place in 2023. “The role of reinsurance has been restored as capital protection instruments rather than earning stabilizers,” he said, agreeing with Attanasio that troubles in the primary sector stem from this realignment of roles.

“That realignment of interest—we see it’s here to stay. [Reinsurance] companies moved away from high frequency layers. Those tighter terms and conditions, we see it very unlikely to change. There is some pressure, but only in the areas which are the most profitable ones where we think that there is some room for adjustment,” he said without specifically identifying these outliers.

Wong-Fupuy started his presentation noting that in June this year, AM Best “for the first time since AM Best has been publishing outlooks for the global reinsurance segment…changed the outlook from stable to positive. The main driver behind this is what we believe is sustainability on underwriting profits,” he said, pointing to the de-risking moves on the part of reinsurers and the absence of new entrants to usher in competition.

Concluding his presentation, he reiterated that conditions are “unlikely to change significantly.” He pointed out that while underwriting profits for reinsurers remained strong in 2024, it was slightly reduced. Hurricane activity in 2024, he said, “has simply helped to maintain that discipline that we expect to continue.”

“There is some slight room for decline [in rates] in the most profitable segments. But nothing major,” he said. “Primary carriers are still forced to retain higher levels [of losses] than they used to in the soft market,” he said.

Given the challenges of the reinsurance program structures that have been in place for the last two year, Attanasio noted that primary insurers have “re-evaluated their risk appetites to deal with this new normal in terms of frequency and severity. And that’s something that we think [is] going to continue.”

Homeowners insurers have also “been pushing rate pretty aggressively, but it’s just inherently more challenging to manage that book of business, particularly since you typically have 12-month policies versus six months on the auto.”

“So, there’s a longer lead time in terms of earning those rate adjustments. And there was a bigger gap to fill up.”

“The other issue with regards to property is there’s a lot of variables,” he said, contrasting the situation where carriers can systematically group cars or driver behavior to get to more granular pricing. “It’s a little bit harder with regards to property,” he said, noting, however, that promising activities in that direction include movements towards by-peril pricing.

What Else Isn’t Changing

Other AM Best analysts described unchanged outlooks for commercial lines and for delegated underwriting authority enterprises—stable for commercial lies and positive for DUAEs.

As in personal lines, however, there are some commercial lines of business face challenges, noted Alan Murray, Director–Commercial Property/Casualty. Stable outlooks for commercial property and workers compensation, and a positive outlook on the commercial excess and surplus lines market, together continue to outweigh negative outlooks that AM Best has on commercial casualty lines—general liability, commercial auto—and director and officers insurance, he said.

Moderator Stefan Holzberger, executive vice president and chief operating officer of AM Best Rating Services, specifically asked Murray whether steady year-over-year declines in workers compensation premium rates are sparking any concerns that the line’s outlook could switch to negative—a move that would likely push the overall commercial lines outlook to negative.

Murray said that while the rate drops would seem to be a credit negative trend, they have largely tracked reductions over the course of a decade in claim cost trends for workers compensation insurance. “These have benefited from a broad reduction in claim frequency and only measured increases in severity over the period. Both medical and indemnity components of workers compensation claims have seen more measured inflationary trends enabling insurers to benefit from lower than originally projected ultimate claims costs,” he said.

“At some point, we expect to see an inflection at which premium rates flatten and then begin again to trend upward. But we do not expect to see a hockey stick-like increase in claim costs, which is something that would prompt more serious concerns.”

While the most positive report of the hour came from Dawn Walker, associate director–Delegated Underwriting Authority Enterprises, Walker voluntarily offered some headwinds for DUAE, putting recent rumblings from Lloyd’s at the top of the list.

“While the market remains poised for growth through 2025, …we should keep an eye on pockets of capacity challenges as some DUAEs really could have an overreliance on reinsurance and [could] really find themselves faced with more stringent underwriting conditions,” she said, adding, “I really say this with Lloyd’s market in mind, as they have noted that they’re putting more emphasis on the quality of risk selection of DUAEs and how they maintain operational complexities, and really looking out for potential misalignments when we’re talking about risk management.”

Also noting that new entrants can face challenges in building out their governance and internal controls and securing stable capacity, Walker concluded, “Execution risks are an offsetting point to watch out for in the market in 2025. But overall, the sector is strong and it continues to show why they’re considered to be such a vital part of the insurance ecosystem,” pointing to niche expertise and continued strong investments in technology and talent, among other continuing positives.