Homeowners ROE Outlook Down

Strong competition and efforts by state regulators to hold down homeowners insurance rates have driven a slight decline in the prospective return on equity in the homeowners line of insurance for 2008, with this year’s prospective ROE at 6.5 percent versus 7 percent in 2007, according to an annual analysis by Aon Re Global. The study also found the expected assessment of residual market facilities is weighing down the countrywide ROE by 0.3 percent. (Residual property plans provide insurance to high risk policyholders who may have difficulty obtaining coverage from the standard market and have seen explosive growth in the course of the last four decades according to I.I.I. analysis.)

Aon said prospective ROE in hurricane-exposed states (Texas to Maine) is 6.0 percent and 7.1 percent in non-hurricane states. To improve returns on equity to 14 percent, rates in hurricane-exposed states would need to rise an estimated 35.3 percent, while rates in non-hurricane states would need to be increased by 12.9 percent. Aon’s take is that insurers in hurricane-exposed states need more capital to protect against catastrophic loss  and that  means more rate increases will be needed to provide attractive return on capital requirements.  A well-designed reinsurance program may reduce a company’s rate level needs.

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