As the abundance of traditional and alternative reinsurance capital persists and expands, the resulting availability of low-cost reinsurance coverage has helped the homeowners insurance business line realise greater potential, according to Bernstein.
In a recent report from financial management firm Bernstein, titled, “U.S. Insurance: With Strong Margins, Cheap Reinsurance, and Pricing Power, Is Homeowners The Best Kept Secret In P&C?” the company discuss the “secular transformation” of the U.S. Homeowners insurance sector.
Bernstein notes that historically, Homeowners Insurance has been faced with various damaging challenges, most notably being the sector’s tendency to misprice low-frequency, high-severity losses over the last few years.
However, “Homeowners Insurance has gone through a quiet secular transformation, with the proliferation of vendor catastrophe models across even the smaller and regional players driving more rational pricing,” stated Bernstein.
The study claims that after Auto, Homeowners is now the second largest line in property and casualty (P&C) insurance, with roughly $86 billion of premiums, highlighting the sector’s importance to firms like Chubb, Allstate and Travelers, the company advises.
What’s changed then explains Bernstein, is that margins have significantly improved across the majority of the industry, and the abundance of cheaper traditional and alternative reinsurance capital, as a means to offset any earnings volatility and successfully manage aggregate exposures, has made Homeowners an attractive asset class for Personal Lines insurers.
Interestingly, adds Bernstein, and unlike the property/property CAT reinsurance line, despite several years of benign catastrophe activity Homeowners pricing momentum has continued, signalling to Personal Line insurers, like Chubb and Allstate, that high-margin growth opportunities exist in the asset class.
The disparity between falling pricing in the property/property CAT reinsurance line and a continued pricing momentum in the Homeowners line, in light of low catastrophe loss levels, demonstrates “the principle that in insurance, being closer to the customer and controlling distribution is the most valuable part of the value chain,” declared Bernstein.
Artemis discussed the positive impact cheaper reinsurance, traditional and third-party, could have on primary insurers late last year, when reinsurer Aon Benfield released a report on the effect cheaper reinsurance capital could have on homeowners’ insurers.
In its report, Aon Benfield said; “Reinsurance capital, both traditional and non-traditional, is at a record high and is available in many new and innovative cost accretive forms to support profitable growth opportunities for primary carriers.”
Concluding, Bernstein warned that it doesn’t expect primary carriers to rely heavily on reinsurance capital to fund future expansion, but there “is clearly an opportunity to improve expected returns through managing exposures, aggregate and earnings volatility.”
The opportunities for primary insurers provided by the abundance of cheaper, reinsurance capital is evident and highlighted by Aon Benfield and Bernstein, while greater deployment also ensures the funds are being put to work and not just adding to the current, tough market conditions.