Homeowners Insurance Could See Crisis If Not Reformed: Aon

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

The homeowners insurance industry could be in crisis over the next decade if regulators and lawmakers do not allow insurers to charge actuarially sound rates for the business, declared a report from Aon Benfield.

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

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

From August 2008 to August 2009, the ROE for the homeowners line of insurance fell from 6.5 percent to 6.1 percent, Aon Benfield said.

According to the report, because insurers cannot expect to "earn reasonable returns" writing this product, it "has the long-term effect of discouraging the participation of private capital in the market."

Aon Benfield said this has resulted in states stepping in to fill the void where insurers have left the marketplace and those states, in turn, are now turning to the federal government for financing.

"The current imbalance is not new, but it is getting worse, and reasonable actions can still prevent a regional or national homeowners insurance crisis over the next decade," the report said.

"To recover their increasing cost of capital, U.S. homeowners insurers continue to struggle through a labyrinth of state rate-making laws, process delays, regulations, consumer price protections and market disruptions from lightly financed and competitive state funds," noted Bryon Ehrhart, chief executive officer of Aon Benfield Analytics, in a statement.

In an interview, Mr. Ehrhart said that it is "troublesome" that in the wake of serious catastrophe loss years insurers have not been allowed to charge adequate rate "commensurate with the risk" in order to fully replenish capital and realize an adequate ROE.

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

Prospective ROEs at current rates in four states and Washington, D.C. were over 10 percent, while in California, Mississippi and Massachusetts 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 26 percent. However, there is substantial disparity in the rate of increase by individual state, with Florida requiring an average increase of almost 94 percent, while North Carolina would need almost 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 need a 35.8 percent rate increase to achieve an ROE of 14 percent. For the rest of the nation the prospective ROE stands at 5.8 percent, but to achieve a 14 percent ROE rates would need to rise 15.2 percent.

The report is based on an analysis of the five leading insurance companies in states making up 80 percent of U.S. population where information is publicly available.