HO Market Stressed Out For Consumers And Insurers

In this article, we will review many of the forces and trends that have recently thrust homeowners into this unaccustomed spotlight. We will also discuss prospects for the near future, including where we think some of the underwriting and claims "battle lines" will continue to be drawn.

There has been an interesting flip-flop in the personal lines segment. Within this sector, there has historically been a pull-and-tug between homeowners and auto coverages. For some years, auto coverage was so highly competitive that there was a shift to homeowners as a way to balance the deteriorating bottom line in auto.

Now, the situation has reversed. Carriers and investors are losing money in homeowners, while auto has once again become more profitable.

While carriers still accepted homeowners business for a number of years, because of the desire to write account business (homeowners and auto) and because investment income ultimately made the line marginally profitable, with ever worsening homeowners loss ratios and investment results, companies are no longer willing to accept the deteriorating results.

The days of homeowners coverage as a "loss leader" are over.

There are many reasons for the rate and profit squeeze in the homeowners area. They include:

The overall hard insurance market and pressure for carriers to earn better returns on invested premiums.

The regulatory environment in many states; especially those "cat" states where rates and coverages are frequently regulated.

The most notorious remains Texas, with its triple-threat loss potential of spring storms, hurricanes and mold. It is no surprise that homeowners insurance became an issue in the last Texas gubernatorial race.

While the economy as a whole is viewed as soft, the housing industry remains strong, some would say exceptionally strong. The South, warmer climates and coastal areas continue to attract population and new home construction, and, overall, demonstrate outstanding demographics.

The much greater value of homes today and continually soaring costs to repair damaged homes or replace ones with total loss.

Homes in excess of $500,000 are now common in most areas of the country. We must couple these greater values with higher valuation of contentsthe computers, home theaters, expensive furnishings, riding mowers, home generators, "toys" like jet-skis or snowmobiles, etc.and the trend for consumers to ask for replacement cost coverage for contents.

This last point deserves emphasis. Recall that we trained insureds to ask for replacement cost coverage and they responded.

Couple natural disaster exposures in these growth areas (i.e. storms, fire, landslides, flooding and mold) with the much greater value of these homes and their contents, and there are trillions of dollars of value are in harms way. Even regions with less aggressive appreciations, like the Midwest, can still get hit hard by winter storms, making for less favorable loss ratios.

In contrast, in many mature urban areas, there is an unhealthy "disjoining" between the market value of homes and what it would cost to replace them.

In rural areas, the lack of adequate security and fire protection, coupled with a scarcity of the highest value homes, prompts a need for specialist policy writing and service.

The consequence of these trends is sticker shock on the part of homeowners that have policies in the standard markets, plus more insureds being driven to surplus coverages. This last set of insureds is the product of major standard carriers abandoning certain high-risk markets; the total number of homes in excess of $500,000 valuation; and much closer review of individual homeowner credit and loss histories.

To this last point, underwriters in the homeowners segment are using the appropriate tools to manage risk, following the principle of "never insuring a stranger." These tools include a credit history and CLUE–a Comprehensive Loss Underwriting Exchange (or similar) report on loss experience of the insured.

In the past, property location, in addition to such givens as valuation and construction specifics, was the major determinant of rates. Now, we are almost underwriting the insured as opposed to underwriting the property.

For example, in Michigan, a recent newspaper report found that six out of 10 of the states largest homeowners writers were using credit reports and CLUE–and reported that the others were thinking about it. (Detroit Free Press, Feb. 2)

While the number of homeowners with excessive loss history may be a small percentage of all policies, the standard industry has embraced these two loss prevention tools wholeheartedly. In the past, many of these people may have fallen under the radar screens.

There are also additional forms of restrictions in standard coverages. Examples include requiring an owners primary home to be with a company as a prerequisite to insuring a vacation or second home; the issue of urban or rural properties mentioned earlier; and prime areas where the value of the land is greater than the structure value.

Thus, tighter underwriting guidelines, not just the hardening of the market, are driving people out of standard lines into surplus coverage. We estimate the potential market for surplus homeowners to be as great as 6-7 million homes nationwide.

We also expect much greater scrutiny in the area of claims repair or replacement. Costs to replace homes continue to increase 4-5 percent per year on average, considering materials and labor. We must add to this the continual upscaling of the "fit and finish" of todays higher value homes, where Formica has given way to Corian, off-the-shelf drapes to custom designer fabrics, and so on.

Claims adjusters report that a partial loss on a home is one of their toughest assignments. We agree and expect insurers to aggressively pursue cost control in the repair of homes.

On the other side of the settlement is a more informed and demanding consumer, educated by Bob Vila and his brethren, less likely to accept less than "the best" at claims time.

In conclusion, there will be growth in our housing stock. Americans will maintain a keen interest in aspiring to bigger and better in what is still one of the most important investments for most families. The higher valuations of homes and contents, and the loss exposures discussed earlier, mean that while we see rates leveling off in the next three years, they will not return to the "good old days" and "cat" areas will still be of concern.

Homeowners was underpriced in the 1990s. Rates are now higher, but homeowners is still a good buy. It is our job to write smartly and properly, controlling exposures and enhancing both premium growth and profitability. In doing so, we must communicate to insureds that the industry is providing excellent value for money.

Homeowners will never again be humdrum or a loss leader, but we can achieve the stability and predictability that helps both the industry and consumers.

William M. McCord is a senior vice president and the director of personal lines for Service General, the personal lines unit of Burns & Wilcox Ltd., an independently-owned managing general insurance agent, headquartered in Detroit/Farmington Hills, Mich. James Griffith is deputy director of personal lines.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.