Aon Says Return on Homeowners Insurance Up but Still Not Earning Its Cost of Capital

Aon Corporation reports that significant rate and underwriting initiatives in the U.S. homeowners’ insurance marketplace continue to fall short of the cost of capital, in a continuing study of return on capital by Aon Re Worldwide.

The findings of the update indicate that the homeowners insurance industry is estimated to have increased its rates by 7.8 percent since the initial study was performed in May/June 2002 and the average hike for new rate filings in the last six months was 12.5 percent.

“The returns still need improvement to fully recover the cost of capital and assure needed underwriting capacity for this essential line of insurance,” Bryon Ehrhart, president of Aon Re Services, remarked. “Insurers are still not making enough money on most homeowners’ policies.”

Ehrhart said that based on filings through December/January 2003, the estimated prospective return on equity (ROE) for homeowners is 5.9 percent compared to six months ago when the expected return was 4.8 percent. The cost of capital for homeowners’ insurers is nearly 14 percent, double the current return.

Aon Re is monitoring this market as it recovers from inadequate and negative returns experienced by many homeowners’ insurers as a result of catastrophic events over the past decade, such as Hurricane Andrew, the Northridge earthquake, several major tornado hail events and the emergence of mold claims.

The study includes comprehensive analysis of rate filings for the top five homeowners’ insurers in states that account for 80 percent of the US population. Aon (www.aon.com) plans to continue semi-annual updates to the study until the market stabilizes.

The study provides a prospective outlook taking into consideration changes that have been implemented, and is adaptable to assess prospective return on capital for individual companies. Results show that although insurers have made progress from the lowest point in the current homeowners’ insurance crisis, further actions to improve underwriting results and management of capital are needed.