Aon: ROE Down Almost 2% on Homeowners

NU Online News Service, Oct. 24, 2:41 p.m. EDT

Homeowners insurers return on equity will be approximately 2 percent less than last year thanks to less-robust investment returns and higher estimates of non-coastal losses, a report from Aon Benfield says.

The report, “Homeowners Return On Equity Outlook,” says insurers' prospective after-tax ROE for homeowners insurance is 4.8 percent on average, a decrease from the 6.9 percent of 2010.

The broker estimates that investment returns will average 3.8 percent during the current annual period, a decrease from the 5 percent seen in prior years.

Excluding this change, insurers' prospective ROE would be 6.3 percent, down from 6.9 percent in 2010, and still well below the true cost of capital, Aon Benfield says.

The report, compiled by the firm's analytics division, reviews the latest rate filings and supporting actuarial information of insurers operating in the 25 largest U.S. states.

The report reveals that homeowners insurers have improved their recovery of the cost of reinsurance capital in recent years, but could still recover a greater share of the annual cost of exposing capital to retained catastrophe losses.

Bryon Ehrhart, chairman of Aon Benfield analytics, says “Great progress has been made across the homeowners-insurance industry to more fully recover the cost of reinsurance over the past few years—a net cost that is generally lower than the cost of exposing an insurer's own capital to catastrophic risk.

“However, homeowners insurers continue to maintain and expose significant capital to retained catastrophe risk. The filings we reviewed show that the annual cost of exposing insurer capital to catastrophic risk is not being fully recovered. Homeowners-insurance consumers therefore continue to benefit from rates that do not fully reflect the annual cost of insuring their homes.”