Strong competition and state regulators' efforts to restrain rates are expected to drive down the prospective return on equity for home insurers by a half-point this year, analysts said.

According to a study by Aon Re Global, the prospective ROE will stand at 6.5 percent versus 7 percent in 2007, and the firm suggested insurers must raise rates and work on their reinsurance arrangements.

Weighing down the countrywide return on equity–by 0.3 percent–is the expected assessment of residual market facilities, insurance vehicles which provide coverage to homeowners unable to obtain coverage in the private insurance marketplace, said Aon.

The analysts found residual market facilities have grown substantially in market share since the start of the decade.

Prospective ROE in hurricane-exposed states (extending from Texas to Maine) is 6 percent, and in non-hurricane states prospective ROE is 7.1 percent, according to Aon Re Global's analysis.

To improve returns on equity to 14 percent, rates in hurricane-exposed states need to rise an estimated 35.3 percent, while rates in non-hurricane states need to be increased by 12.9 percent.

“Insurance companies in the hurricane states need more capital to protect against catastrophic loss, and this means that larger rate increases are needed to improve the return on capital to an attractive level,” Randall E. Brubaker, senior vice president with Aon Re Services, said in a statement.

A well-designed reinsurance program may reduce an insurance company's rate-level needs, the firm said.

A study released by Aon Re Global last month found reinsurance continues to be one of the most accretive forms of capital available in the industry.

Equity risk premiums and credit risk spreads are significantly more expensive, and the incremental benefit of reinsurance as a form of underwriting capital has become even more pronounced, Aon found.

“Reinsurers have a varying appetite for additional risk based on whether an insurance company's underwriting portfolio offers the reinsurer diversification or further concentration of risk,” said Kenneth Selzer, executive vice president with Aon Re Global.

“We take this into consideration in advising our clients on the optimal mix of equity and reinsurance capital, and also in the placement of their programs in the reinsurance marketplace,” said Mr. Selzer.

Additional information about the “2008 Homeowners Return on Equity Outlook” is online at http://aon.mediaroom.com/index.php?s=63&item=274.

Special Reports /

Analysts See Homeowners Insurance ROE Declining

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