Cheaper reinsurance helps home insurers reduce volatility: Aon Benfield

The decline in reinsurance pricing, thanks to excess  traditional and growing alternative capital, mitigates market volatility for primary homeowners insurers, and serves to “support profitable growth opportunities,” according to Aon Benfield.

The global reinsurance broking arm of Aon plc., Aon Benfield, has predicted a continuation of improved returns for U.S. homeowners insurers during 2015, driven in part by the cheaper cost of reinsurance capital.

The reinsurer highlights three main drivers for its predicted improvement in the prospective ROE for U.S. homeowners insurers’ during 2015, as follows;

• Improved prospective rate levels in primary insurance rates;
• A decline in the estimated catastrophe loss ratio, resulting from updates to the vendor catastrophe models used in the study;
• The decreasing cost of reinsurance, utilized by insurers to mitigate the volatility inherent in the homeowners line.

“Reinsurance capital, both traditional and non-traditional, is at a record high and is available in various new and innovative cost accretive forms to support profitable growth opportunities,” states Aon Benfield.

In its latest annual homeowners report, ‘Homeowners ROE Outlook, October 2015,’ Aon Benfield notes that rates across U.S. homeowners business lines during the 18 months ending August 2015, increased by an average of 4%.

“However, in Florida rate decreases are offsetting the positive effects of reduced reinsurance costs, limiting the improvement in the prospective ROE outlook for the state,” the reinsurer added.

A prolonged lack of severe storm activity in Florida has seen rates continue to decline, serving to limit the potential for an improved ROE for homeowners insurers that operate in the state, offsetting the benefits of cheaper reinsurance capacity.

But for the most part Aon Benfield sees ample opportunities for growth in the sector, emphasised by Greg Heerde, Head of Aon Benfield Analytics Americas; “The footprint of profitable growth opportunities continues to expand for the homeowners line of business, with positive rate momentum being maintained. We continue to see increased utilization of risk-adjusted pricing methods and the development of by-peril rating plans.”

According to data provided by Aon Benfield in its report, U.S. homeowners insurance premiums over the last 15 years has grown, steadily.

And, as the reinsurance market remains awash with capital that’s cheaper, efficient, willing and able to be deployed to support the primary players’ continued expansion of homeowners business, an area Aon notes is “now a critical element of the growth strategy for many personal lines insurers,” it’s utilization will likely continue to grow further in the space.

Besides aiding and supporting the expansion of primary players in the homeowners sector, the trend also provides and opportunity to reinsurers and insurance-linked securities (ILS) market participants to deploy some capital into diversified, less competitive business lines.

As rates in the space continue to improve, Aon Benfield feels the focus is turning to increased market sophistication, which in turn is resulting in the improved utilization of data and models to determine catastrophe exposures across the homeowners landscape, a trend the firm expects to continue.

To aid the process, Head of Aon Benfield Risk and Capital Strategy Group, Parr Schoolman underlines how the firms analytical capabilities can be utilized; “Our tools provide clients a granular breakdown of all their costs of catastrophe risk, which can be directly incorporated into rate filings and underwriting processes.”