Oct 27, 2014 - capital requirements to maintain an A.M. Best âAâ rating for a nationwide diversified personal lines
Aon Benfield
Homeowners ROE Outlook October 2014
Risk. Reinsurance. Human Resources.
Homeowners: Positive Outlook, Expanding Growth Opportunities The overall outlook for the Homeowners line of
A failure to segment underlying cost differences between
business is promising. Excluding Florida, the industry’s
exposures jeopardizes the ability to identify areas that
prospective ROE is 11.8 percent with the outlook for
diversify risk and target them for growth. Aon Benfield
30 states expected to clear a 12 percent hurdle rate.
Analytics provides solutions to clients to help them
The footprint of profitable growth opportunities
quantify their own unique cost of catastrophe risk,
continues to expand for this line of business. When
including expected losses, reinsurance, and cost of capital.
Florida is included, our countrywide prospective after-tax
These solutions are available to be integrated into rate
ROE estimate is 7.9 percent, up from last year’s 4.6
filings, product management processes, and underwriting
percent. This prospective ROE is based on estimated
systems of our clients, providing risk quantification data at
capital requirements to maintain an A.M. Best “A” rating
potentially all levels of detail including product line, state,
for a nationwide diversified personal lines insurer writing
territory and individual risk.
both Homeowners and Auto.
Thinking of Homeowners as a growth engine is now a
Trends supporting a positive profitability outlook on
possibility for many personal lines insurers. As profitable
Homeowners continue to emerge. Reinsurance capital,
opportunities emerge, we will continue to collaborate
both traditional and non-traditional, is at a record high
with our clients to help them implement sophisticated
and is available in many new and innovative cost accretive
pricing and risk management processes and execute on
forms to support profitable growth opportunities for
their strategies.
primary carriers. Aon Benfield Analytics’ review of Homeowners rate changes continues to find that the country’s largest Homeowners insurers are maintaining positive rate momentum. Furthermore, carriers are
If you have any questions or suggestions that we could explore in future editions, please contact a member of Aon Benfield's Risk & Capital Strategy team.
increasingly utilizing risk adjusted pricing methods and improving sophistication through by peril rating plans. In order to maximize the profitable growth opportunities,
Contacts Parr Schoolman
the next phase of advancement will occur in better
[email protected]
segmentation within and between rate adequate states.
Robert Fox
Because catastrophe exposure significantly influences the
[email protected]
volatility of the Homeowners line, granular differentiation of reinsurance and capital costs and more refined territory definitions matching rates to cost variations is important.
Homeowners ROE Outlook 2014
Paul Eaton
[email protected]
August 2014 Prospective ROE at Current Rates
Prospective ROE percent Less than 0 0 to 4 4 to 8 8 to 12 At least 12
Countrywide ROE Estimate: 7.9%
ROE Study Methodology The basis of the prospective ROE estimates are industry state and aggregate statutory filing data including reported direct losses, expenses, payout patterns, and investment yields. We replace actual historical catastrophe losses as measured by PCS with a multi-model view of expected catastrophes. On-leveling of direct premiums to current rates uses rate filings of the top 20 insurance company groups by state. Finally, estimated capital requirements and reinsurance costs consider a nationwide personal lines company writing both Home and Auto business at a capitalization level consistent with an A.M. Best “A” rating. The ROE estimates exclude earthquake shake losses, as the premium and losses for that coverage are recorded on a separate statutory line of business The diversification available to a nationwide personal lines insurer impacts the ROE calculation. For instance, Homeowners business in California diversifies Gulf and East Coast hurricane exposure for a nationwide insurer. A California standalone would incur higher capital and reinsurance costs than the California portion of a nationwide insurer with similar premium volume in the state. Similar results are to be expected for any other regional or single state insurer.
Homeowners ROE Outlook 2014
Change in prospective ROE from previous year 10%
1.0% 1.0%
8%
-0.3%
7.9%
1.7% 6%
4.6%
4% 2% 0%
2013 Improved Prospective Prospective ROE Rate Level
Lower Modeled Cat Losses
Lower Decreased 2014 Reinsurance Investment Prospective Margin Yields ROE
The drivers of the ROE improvement from last year are (1) continued rate activity in the primary rates, (2) a decline in the estimated catastrophe loss ratio resulting from updates to the vendor catastrophe models used in the study, and (3) declining costs of reinsurance to capitalize the volatility inherent in the Homeowners line. A small reduction in achieved yields on the invested policyholder funds prevented the estimated ROE from breaching the 8.0 percent threshold.
54 78 78 81 81 82 83 83 83 83 85 87 87 87 88 89 89 89 90 90 92 93 93 94 94 95 95 96 96 97 99 100 100 103 103 107 109 110 111 111 111 111 111 113 114 117 120 124 133 144 147
Ten-year historical direct combined ratio 87
92
103
97
93 103
89
111
107
82
111
85 78
111
113
147
100
94 83
120
117
144
95
89 90 81 78
83
124
111
96
94 95
110
133 96
87
99
111 81
88
100
109
90
83
89
87
114
Combined ratios 93
Countrywide combined ratio: 98%
Less than 90 90 to 100 100 to 110 110 to 120 Over 120
83 54
All combined ratios shown in the map (left) consider ten years of actual direct premiums, incurred losses and an allocation of countrywide expenses. Year to year reported profitability for Homeowners depends heavily upon random occurrences of meteorological and geophysical phenomena. As such, reported calendar year results can be a crude measure of profitability and rate adequacy on an expected basis, but are a necessary starting point for a detailed assessment of expected profitability.
Ten-year historical combined ratio adjusted for expected catastrophe loss 91
108
100
98
94
104 110
89
100
109
83
90
108
97
109
101
111 112
100 109
115
Combined ratios 118
Less than 90 90 to 100 100 to 110 110 to 120 Over 120
84 93
75 80 85 85 86 86 87 87 88 88 89 89 89 90 90 90 91 91 91 91 92 92 92 92 92 92 92 92 92 92 92 92 92 92 93 93 93 93 93 93 93 93 93 93 93 93 93 93 94 94 94
97
111
100
Countrywide combined ratio: 101%
92
110
111
94
93 94 95 86
102
113
112 92
97 92
113
118 87
96
106
117
94
90
92
121
For a more robust measure of expected profitability we adjust actual direct incurred losses by removing cat losses, as measured by PCS, and replacing it with expected cat losses using multiple models. Modeled cat losses also include expected costs of assessments from state sponsored insurers. In many states, such as Florida, these adjustments to incorporate modeled expected cat losses explain the lack of expected profitability despite favorable historical combined ratios over the past ten years. Adjusting combined ratios for expected versus historical cat losses is an important step to distinguish weather related randomness from inadequately priced business. While the state level adjustments can be quite severe, the ten year nationwide experience cat loss ratio of 18 percent is slightly less than the modeled expected catastrophe loss ratio of 21 percent.
Combined ratio to achieve a 12 percent return on allocated capital 92
93
92
91
93
92 92
92
94
93
94
93 92
93
87
92 80
92
88 86
92 93
90
92
93
85
91 92
93
88
Countrywide combined ratio: 88%
89
94
93 93
90
93
93
92
93
92
93
85 91 87 92
86
89 89
90
91 75
Combined ratios Less than 80 80 to 87 87 to 90 90 to 93 Over 93
The percentages show the target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and non-catastrophe risk. The targets are for a sample countrywide company only, and will vary among individual companies because of state distribution of premiums, capital adequacy standards, target return on capital, allocation methodologies, reinsurance and other considerations.
Homeowners average approved rate change 4.4
5.0
8.4
4.0
6.2
3.6
5.8
*
3.7 4.5
3.4
10.4
7.9
3.2
3.1 7.4
5.7
7.2
8.0 5.3 6.4 5.0
5.2
7.9 6.5
4.6
4.1 6.2
5.5
7.7
7.5
9.9
4.7 6.1
9.3
5.3
Countrywide average approved rate change: 5.8%
6.7
6.5
10.2 6.6
3.1
6.7
8.4 3.3
4.2
6.5
7.0
4.2
Approved rate change Less than 4.0 4.0 to 6.0 6.0 to 8.0 8.0 to 10.0 Over 10.0 *Rate filings not available
4.5 5.4 -1.5
The map shows average approved rate changes filed between January 2013 and June 2014 for the top 20 Homeowners groups by state. The largest rate actions were in the Midwest and Tornado Alley states with average approvals above 7 percent. Gulf states, where rate is most needed, show approved rate increases slightly above the countrywide average; more activity is still needed in these states to achieve ROE targets. California, the Pacific Northwest, and New England lagged countrywide rate activity but states in these regions are closer to ROE target hurdle rates.
Direct written premium growth, 2010 to 2013 11.8
27.3
20.5
7.7
22.2
7.0
21.2
13.1 15.7
13.7
26.1
3.3
22.7
32.6 13.2
15.6
13.1 15.6
23.5
16.7
19.6
18.1 17.7
17.5
20.8
18.5
25.8
21.6 14.9
Countrywide premium growth: 16.0%
10.3
22.3
25.8 2.1
9.0
19.9
28.0
11.9
8.9
12.1
15.5 17.3
16.2 14.8 11.0
14.5 16.6
17.7
24.0 15.8
Percent achieved
Industry premium change from 2010 to 2013 shows strong growth for the Homeowners line. When compared to Auto growth over the same period the picture is clear: growth opportunities in personal lines start with “getting Home right”. Midwest and Tornado Alley states had the largest premium increases with many exceeding 20 percent. As in 2013, only one state had an overall premium decrease over the three year interval. This year that state is Hawaii; last year it was Nevada.
Less than 12 12 to 16 16 to 20 20 to 26 Over 26
9.8 -3.7
Industry—Homeowners
Direct written premium growth Home
90.0
DWP
Auto
2.5
Loss & LAE
80.0
DWP Growth Index
70.0
Amount ($B)
-1.5 3.1 3.1 3.2 3.3 3.4 3.6 3.7 4.0 4.1 4.2 4.2 4.4 4.5 4.5 4.6 4.7 5.0 5.0 5.2 5.3 5.3 5.4 5.5 5.7 5.8 6.1 6.2 6.2 6.4 6.5 6.5 6.5 6.6 6.7 6.7 7.0 7.2 7.4 7.5 7.7 7.9 7.9 8.0 8.4 8.4 9.3 -3.7 9.9 2.1 10.2 3.3 10.4 7.0 *7.7 8.9 9.0 9.8 10.3 11.0 11.8 11.9 12.1 13.1 13.1 13.2 13.7 14.5 14.8 14.9 15.5 15.6 15.6 15.7 15.8 16.2 16.6 16.7 17.3 17.5 17.7 17.7 18.1 18.5 19.6 19.9 20.5 20.8 21.2 21.6 22.2 22.3 22.7 23.5 24.0 25.8 25.8 26.1 27.3 28.0 32.6
60.0 50.0 40.0 30.0 20.0
2.0
1.5
1.0
10.0 0.0
‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
0.5
‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
Aon Benfield
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About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world‘s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world‘s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals’ expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com. © Aon plc 2014. All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Risk. Reinsurance. Human Resources.
