Efficient reinsurance & ILS capital benefits U.S. homeowners market: Aon

by Artemis on October 25, 2016

Continued rate declines and reduced pricing in the global reinsurance market has enabled U.S. homeowners insurers to take advantage of both traditional and non-traditional reinsurance capacity, and pursue growth opportunities in spite of market headwinds, according to Aon Benfield.

Premiums in the U.S. homeowners arena reached $89 billion in 2015 and are expected to surpass $90 billion for the first time ever by the end of 2016, despite insurers that operate in the space experiencing a declining return on equity (RoE), says Aon Benfield in its 2016 Homeowners ROE Outlook Report.

In order to mitigate the sector’s declining RoE, which Aon Benfield says has fallen from an estimated 8.6% in 2015 to 6.7% in 2016; the reinsurance broker notes the availability and utilisation of efficient reinsurance capacity from both traditional and alternative sources.

“Reinsurance capital, both traditional and non-traditional, is available at aggressive pricing and provides savvy carriers significant flexibility in managing growth options within profitable footprints while maintaining net risk positions,” said Aon Benfield.

The report explains that increased expenses and a slowdown of rate increases in the U.S. homeowners segment has contributed to negative impacts on the market’s combined ratio.

While an increased estimated catastrophe loss ratio following updates to the vendor cat models utilised in the space, and changes in assumed yield are further homeowners lines headwinds that have been harmful to both combined ratios and RoEs.

However, some homeowners insurers have utilised the more efficient wealth of reinsurance capital to limit volatility in the space, which ultimately helped to improve profitability in the face of RoE headwinds, says Aon Benfield, and can also support market growth at times of broader insurance industry turmoil and stiff competition.

Although, “Softening reinsurance costs have cumulatively added over 200bps of ROE in our study since 2013; it remains to be seen where reinsurance pricing will bottom out,” warns Aon Benfield.

The softening reinsurance market cycle has essentially created a buyers market where insurers can take advantage of the competitive nature of the space and abundance of both traditional and third-party reinsurance capital at more efficient rates, and under more favourable terms and conditions (T&Cs).

“Our study reveals that at prospective 2017 rates, homeowners insurance provides accretive returns in the majority of states, and opportunities exist for insurers to pursue profitable growth in the line,” said Greg Heerde, Head of Americas Analytics for Aon Benfield.

While Parr Schoolman, Head of Aon Benfield’s Risk and Capital Strategy team, said; “We are continuing to develop tools and services to help provide clients insight, at a granular level, into which homeowners risks are most likely to be profitable.”

And while the U.S. homeowners insurance market is expected to grow throughout the remainder of 2016, in terms of premiums, insurers can utilise features and capacity of the reinsurance and insurance-linked securities (ILS) space to limit the impact on RoEs from market headwinds.

Furthermore, homeowners lines are heavily exposed to a range of natural catastrophe perils, such as hurricanes, winter storms, tornadoes, hail storms, flooding, and so on, an area the reinsurance and ILS markets are very comfortable and experienced operating in, and willing to provide solutions for.

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