Cheaper cost of reinsurance capital helps homeowners insurers: Aon Benfield

A new report from reinsurance broker Aon Benfield shows that the cheaper cost of reinsurance capital, both traditional and non-traditional, is improving the outlook for homeowners insurers across the United States.

The 2014 Homeowners ROE Outlook report from Aon Benfield (available via the brokers website here) reviews industry aggregate state level statutory financial filing information along with rate filings and supporting actuarial information for the 20 top homeowners insurance groups by state.

The report finds that large U.S. homeowners insurers’ prospective after-tax return-on-equity (ROE) for is 7.9% on a countrywide average up from a 2013 figure of 4.6% and 11.8% excluding Florida, up from 8% in 2013.

The sharp leap in ROE for these large primary insurers is down to continued improvement in primary insurance rates, a decline in the estimated catastrophe loss ratio due to vendor model updates and a reduction in the cost of reinsurance capital available to these primary insurers.

Aon Benfield said that; “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.”

The declining cost of reinsurance capital has allowed homeowners insurers to better manage the volatility that is inherent in this line of business. Aon Benfield said that the cost of reinsurance is now accretive to insurers return outlook, which could be a big deal for large homeowners insurers who have been struggling with ROE’s in recent years.

This is why some insurance company CEO’s are beginning to look to ways that they can leverage lower-cost, or more efficient, reinsurance capital as a way to grow, access new lines of business or create new product offerings. With reinsurance capital significantly cheaper primary insurers have more flexibility in their capital model and are better able to smooth the volatility within their earnings as well as seek out new growth opportunities.

Alternative reinsurance capital and insurance-linked securities (ILS) are a contributing factor to the cheaper cost of reinsurance capacity for these primary insurers. Despite the fact that some insurers have been increasing retentions recently, there is an expectation that they will begin to make more use of this cheaper capacity to help them to protect and grow their businesses for the future.