Softer reinsurance pricing saved P&C insurers 210bps of RoE

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U.S. property insurers are set for higher profits this year, with increased premiums underwritten in homeowners business as well as improving returns on equity (RoE), part of which can be attributed to the softening of the global reinsurance market.

The U.S. homeowner insurer market is set to achieve direct written premiums of around $96 billion in 2018, according to Aon Reinsurance Solutions, with improvements in rates through the year so far driving the growth.

A study by the reinsurance broker shows that the top 20 US homeowners’ insurers averaged a countrywide approved rate increase of 4% during the 18 months to September 2018, with certain states including California, Colorado, Nevada, Rhode Island, and South Dakota hitting or exceeding 6%.

The Florida homeowners insurers also achieved an average rate increase of 6% during the period, but Aon notes that this is unlikely to offset the impacts from challenges including assignment of benefits and claims adjustment cost issues.

Helping homeowners insurers to better profitability if the softening of the reinsurance market, as efficient capital flooded in to help these insurance firms better protect themselves at lower cost, enabling them to manage their probable maximum losses more effectively, while continuing to grow their premiums.

Impressively, Aon Reinsurance Solutions notes that the softening of reinsurance pricing over recent years has cumulatively added more than 210bps of RoE to the homeowners insurers studied since 2013.

That’s a significant amount, averaging out at 4% of RoE addition per year, over the five since 2013.

This significant boost has helped many insurers remain profitable, at a time when rates are overall lower than they were at the start of that period.

It reflects the importance of efficient risk capital in maintaining a functioning insurance market, as well as the influence that lower cost reinsurance has on primary pricing but at the same time on primary insurers ability to make returns.

Interestingly, Aon notes that the prospective 2018 after-tax return-on-equity (ROE) for US homeowners’ business was only 5.5% on a countrywide average, which is up on 2017’s 4.5%.

If softer reinsurance pricing is contributing as much as 210bps over 5 years, it’s clear that the softening of reinsurance pricing thanks to the growth of alternative capital, has had a significant bearing on the U.S. homeowner insurers ability to make acceptable profits for their shareholders.

Commenting on the homeowners line of business Greg Heerde, Head of Americas Analytics for Aon Reinsurance Solutions, said, “With prospective growth both in written premiums and ROE, on a generalized basis the homeowners line of business remains attractive to insurers. Overall, the line is healthy, providing expected long-term underwriting profitability, and has many segments posting exceptional performance.”

Declining reinsurance capital costs have played a role in helping insurers to maintain RoE returns for shareholders and it’s likely they will continue to do so.

Paul Eaton, Managing Director in Analytics for Aon Reinsurance Solutions, added, “It is worth noting that homeowners’ business is proving to be attractive to start-ups and insurtech players, which are collectively utilising both ‘full stack’ insurer and MGA or partnership models. We believe that the combined effect of these entrants drives increased sophistication in the underwriting of this business line.”

With further competition and increasing sophistication on the way for the U.S. homeowner insurer segment, the need for efficient capital and capacity is likely to keep on rising.

It’s likely U.S. primary insurers will continue to find innovative ways to bring third-party capital within their own business models, to further reduce their costs of reinsurance and to leverage partner capital to support their expansion and growth.

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