Homeowners' coverage represented the most volatile major insurance line in the 1992-2005 period, according to an Aon Re Global report published this week.
The study shows that the private passenger auto line experienced the lowest volatility during that period, followed by the auto physical damage, commercial auto and workers' compensation lines.
The 2004-2005 Atlantic hurricane seasons contributed to much of the volatility for homeowners in the 14-year period, which had three times the volatility of commercial auto coverage.
Excluding catastrophe losses, the homeowners' line has a risk level comparable to the commercial auto line. Liability lines including medical malpractice also have significantly above-average volatility.
Aon Re's Insurance Risk Study quantifies the systemic risk for each line of business, representing the risk to a large portfolio from nondiversifiable risk sources such as:
o Changes to market rate adequacy and underwriting terms and conditions.
o Misestimating plan loss ratios.
o Frequency and severity trends.
o Weather-related losses.
o Legal reforms and court decisions.
o Level of economic activity and macro-economic factors.
For large books of non-cat-exposed business, systemic risk is the major component of underwriting volatility.
Stephen Mildenhall, Aon Re Services' executive vice president and chief actuary, said that insurers can use the factors as a basis for their internal capital modeling to ensure that simulation modeling tools produce credible results.
"The factors also will help insurers address recent rating agency requirements for robust underwriting risk modeling," he added.
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