NU Online News Service, Oct. 26, 3:26 p.m.EDT

The homeowners insurance industry could be in crisis over thenext decade if regulators and lawmakers do not allow insurers tocharge actuarially sound rates for the business, declared a reportfrom Aon Benfield.

The assessment from the reinsurance brokerage subsidiary ofChicago-based insurance broker Aon comes in a study titled"Homeowners ROE Outlook."

It reports that the prospective return on equity for 2009declined 0.4 points over last year, making the line an unattractiveplace for investors.

From August 2008 to August 2009, the ROE for the homeowners lineof insurance fell from 6.5 percent to 6.1 percent, Aon Benfieldsaid.

According to the report, because insurers cannot expect to "earnreasonable returns" writing this product, it "has the long-termeffect of discouraging the participation of private capital in themarket."

Aon Benfield said this has resulted in states stepping in tofill the void where insurers have left the marketplace and thosestates, in turn, are now turning to the federal government forfinancing.

"The current imbalance is not new, but it is getting worse, andreasonable actions can still prevent a regional or nationalhomeowners insurance crisis over the next decade," the reportsaid.

"To recover their increasing cost of capital, U.S. homeownersinsurers continue to struggle through a labyrinth of staterate-making laws, process delays, regulations, consumer priceprotections and market disruptions from lightly financed andcompetitive state funds," noted Bryon Ehrhart, chief executiveofficer of Aon Benfield Analytics, in a statement.

In an interview, Mr. Ehrhart said that it is "troublesome" thatin the wake of serious catastrophe loss years insurers have notbeen allowed to charge adequate rate "commensurate with the risk"in order to fully replenish capital and realize an adequateROE.

When broken down by state, insurers in some places are doingwell, while others are faring well below the current average, thereport revealed.

Prospective ROEs at current rates in four states and Washington,D.C. were over 10 percent, while in California, Mississippi andMassachusetts the ROE was less than 2.5 percent.

Nationwide, in order for insurers to obtain a 14 percent ROE,homeowners insurance would have to see an increase of more than 26percent. However, there is substantial disparity in the rate ofincrease by individual state, with Florida requiring an averageincrease of almost 94 percent, while North Carolina would needalmost 2 percent, Aon Benfield calculated.

By region, along the East and Gulf Coast hurricane-prone states,the prospective ROE currently stands at 6.3 percent, but would needa 35.8 percent rate increase to achieve an ROE of 14 percent. Forthe rest of the nation the prospective ROE stands at 5.8 percent,but to achieve a 14 percent ROE rates would need to rise 15.2percent.

The report is based on an analysis of the five leading insurancecompanies in states making up 80 percent of U.S. population whereinformation is publicly available.