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Study: Homeowners Insurers Continue to Maintain and Expose Significant Capital to Retained Cat Risk

Source: Aon Benfield

Posted on 24 Oct 2011

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Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corporation today launches its annual Homeowners ROE Outlook report, which analyzes insurers’ prospective returns on equity for homeowners business based on their July 2011 rate filings.

The report, compiled by the firm’s Analytics division, reviews the latest rate filings and supporting actuarial information of insurers operating in the 25 largest U.S. states. It reveals that insurers’ prospective after-tax ROE for homeowners insurance is 4.8 percent on average, a decrease from the 6.9 percent of 2010, mainly due to forecast subdued investment returns and higher estimates of non-coastal losses.

Aon Benfield estimates that investment returns will average 3.8 percent during the current annual period, a decrease from the 5.0 percent seen in prior years. Excluding this change, insurers’ prospective ROE would be 6.3 percent, down from 6.9% in 2010, and still well below the true cost of capital.

The report reveals that homeowners insurers have improved their recovery of the cost of reinsurance capital in recent years but could still recover a greater share of the annual cost of exposing capital to retained catastrophe losses.

Bryon Ehrhart, Chairman of Aon Benfield Analytics, said: “Great progress has been made across the homeowners insurance industry to more fully recover the cost of reinsurance over the past few years – a net cost that is generally lower than the cost of exposing an insurer’s own capital to catastrophic risk. 

However, homeowners insurers continue to maintain and expose significant capital to retained catastrophe risk. The filings we reviewed show that the annual cost of exposing insurer capital to catastrophic risk is not being fully recovered. Homeowners insurance consumers therefore continue to benefit from rates that do not fully reflect the annual cost of insuring their homes.”