Oct 26, 2015 - of loss experience with catastrophe model loss estimates, .... 91. 93. 94. 84. 93. 88. 89. 92. 94. 95. Co
Aon Benfield
Homeowners ROE Outlook October 2015
Risk. Reinsurance. Human Resources.
Homeowners: Positive Outlook, Expanding Growth Opportunities For a nationwide, personal lines insurer the overall
A failure to segment underlying cost differences among
outlook for the Homeowners line of business continues
exposures jeopardizes the ability to identify areas that
to be positive. Reinsurance capital, both traditional
diversify risk and target them for growth. Aon Benfield
and non-traditional, is at a record high and is available
Analytics provides clients with solutions to help them
in various new and innovative cost accretive forms to
quantify their own unique cost of catastrophe risk,
support profitable growth opportunities. Aon Benfield
including expected losses, reinsurance, and cost of capital.
Analytics’ review of Homeowners rate changes continues
These solutions are available to be integrated into rate
to find that the country’s largest Homeowners insurers
filings, product management processes, and underwriting
are maintaining positive rate momentum. Furthermore,
systems of our clients, providing risk quantification data at
carriers are increasingly utilizing risk adjusted pricing
potentially all levels of detail including product line, state,
methods and improving sophistication through by-peril
territory, and individual risk.
rating plans.
Homeowners is now a critical element of the growth
In a world of persistently low investment yields, our
strategy for many personal lines insurers, and we
countrywide prospective after-tax ROE estimate is
appreciate the opportunity to collaborate with our
8.6 percent, up from last year’s 7.9 percent. Excluding
clients to help them implement sophisticated pricing and
Florida, the industry’s prospective ROE is 12.6 percent
risk management processes that facilitate the execution
with 36 states projected to clear a 10 percent hurdle rate.
of their strategies.
The footprint of profitable growth opportunities continues to expand for the Homeowners line of business.
Contacts
As overall rate levels improve, the focus is shifting to
Parr Schoolman
increased sophistication in risk segmentation. Because
[email protected]
catastrophe exposure significantly increases the volatility of the Homeowners line, filtering the price signal through the noise of loss experience is challenging. Reconciliation
Robert Fox
[email protected]
of loss experience with catastrophe model loss estimates,
Paul Eaton
granular quantification of reinsurance and capital costs
[email protected]
differentiation, as well as more refined utilization of exposure data in pricing algorithms are needed to determine the appropriate location level target rate.
Homeowners ROE Outlook 2014
August 2015 Prospective ROE at Current Rates
Countrywide ROE estimate: 8.6%
Prospective ROE percent Less than 0 0 to 3 4 to 6 7 to 9 10 and above
ROE study methodology The basis of the prospective ROE estimates are industry state and aggregate statutory filing data including reported direct losses, expenses, payout pattern, and investment yields. We replace actual historical catastrophe losses as measured by Property Claims Services with a multi-model view of expected catastrophe loss. 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% 8%
7.9%
0.2%
0.3%
0.3%
-0.2%
8.6%
6% 4% 2% 0%
2014 Improved Lower prospective prospective modeled ROE rate level catastrophe losses
Lower reinsurance margin
Decreased 2015 investment prospective yields ROE
The 2015 nationwide ROE estimate of 8.6 percent is an improvement over our 2014 estimate of 7.9 percent. The three main drivers of the improvement 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 investment yields provided the only headwind to improved ROE outlook.
HI FL AK NY PA VT NH MA ID UT WI NC ND IA WA MI AL ME MO AR CA MN OR US KY VA IN IL DC NJ DE NV AZ OH TN KS LA NM WV CT MD MS SC GA TX SD MT CO RI OK NE WY
Ten year Property Claims Services loss experience vs. model average annual loss
-3
-7
11
-9
1
0
-3
-5
-4 -4
4
3
-4 0
-3
-1
8
2
0
-10
-4
9
-15 -14
39
3
-2
48
-9
Loss ratio points
Countrywide: -4%
Less than -10 -10 to -4 -3 to 3 4 to 9 10 and above
-37
0 -38
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 54 114 78 117 78 120 81 124 81 133 82 144 83 147 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
-11 6
-4 1 -9 -4
-4 8
-3
-2
0
3
8
-3 14
9
0
-6
5
The maps left and below show, in loss ratio points, the amount that catastrophe experience exceeds model average annual loss. Adjusting combined ratios for expected versus historical catastrophe loss is an important step to distinguish weather related randomness from inadequately priced business. Historical catastrophes can distort measures of results at a state level, causing the noise to overwhelm the signal. While the state level adjustments can be significant, the ten year nationwide experience catastrophe loss ratio of 15 percent is slightly less than the modeled expected catastrophe loss ratio of 19 percent. For both the five and ten year views, the lack of a major hurricane landfall in the US has resulted in favorable reported loss ratios in many coastal states, including Florida. For the coastal states in total, the ten year catastrophe loss experience was 17 loss ratio points, well below the modeled expectation of 25 points.
Five year Property Claims Services loss experience vs. model average annual loss
-4
-12
24
-5
-1
-11
3
10
-3
-6
-5
9
-2 5
-3
0
14
5
0
-8
-1
16 -18
-25
-17
2 9 -6 -2
-2 3
-8
0
6
3
6
0 27
20
5
-1
19
-7 17
-10
The midwest and tornado alley states have experienced much more loss activity during the last five years than the catastrophe model estimates, causing a loss ratio drag of 5 points. Texas presents an interesting juxtaposition as the favorable hurricane experience drives the state’s favorable experience, even though the north and west portions of the state have experienced unfavorable thunderstorm losses.
-11 5
-4
Loss ratio points
Countrywide: -5%
Less than -10 -10 to -4 -3 to 3 4 to 9 10 and above
-45 0 -38
Combined ratio to achieve a 10 percent return on allocated capital
94
95
95
95
95 94
94
95
95
95
95 94
95
90
94 94
92
94
95
88
94
84
88 93 89 93
89 88
91 91
92
93
Combined ratios 78
94
91
93 94
94
91
Countrywide combined ratio: 91%
91
95
95 94
93
95
95
95
94
92 94
95
Less than 80 80 to 85 86 to 90 91 to 93 94 and above
The percentages in the map on the left show the target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and noncatastrophe risk. The targets are for a sample nationwide 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. For a diversified insurer with a footprint similar to the industry, the target combined ratios fall into three main categories: Florida, other coastal states, and non-coastal states.
Homeowners average approved rate change
3
3
7
3
4
3
4
3
7
4
*
3 4
3
7
5
4
4
3 7
5 4
6
6 5 4
4
3 6
4
6
5
7
5
4
5
4
5
3 5
4 7
5
1
3
9 5
3
Approved rate change
Countrywide: 4%
Less than 2 2 to 3 4 to 5 6 to 7 8 and above *Rate filings not available
-1
-1 -1
The map on the left shows average approved rate changes filed between January 2014 and August 2015 for the top 20 Homeowners groups by state. Rate activity slowed nationwide consistent with findings that more states are nearing ROE target hurdle rates. The largest rate actions primarily came in states, including Texas, Montana, South Dakota, Colorado, Oklahoma, and Nebraska, with significantly adverse tornado and hail experience in the last three to five years. Florida primary rates fell preventing carriers from realizing ROE improvements despite reduced reinsurance costs.
Direct written premium growth, 2011 to 2014
26
25
10
21
14
25
14 17
17
33
5
26
30 18
13
18
31
19
18 19
18
24
20
13
19 17
20
16
23
Percent achieved 11
3
Industry—Homeowners
Amount (USD billions)
Less than 12 12 to 15 16 to 19 20 to 25 26 and above
Industry premium change from 2011 to 2014 shows growth for home continues to outpace auto. Strong performance in homeowners is strategically important for personal lines carriers looking to increase the top line. The regions with the largest premium changes in the period included midwest and tornado alley states in the belt from Texas to North Dakota. Strong overlap between premium growth and upward rate activity suggests an important piece of overall growth is the push towards rate adequacy.
Direct written premium growth Direct premiums written
Loss, defense, and cost containment
80.0
19
18 16
14
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
20 18 16 10
18
Countrywide: 17%
90.0
16 17
21
27 9
13
20
29
10
11
‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14
Direct written premium growth index
12
Home
Auto
2.5
2.0
1.5
1.0
0.5
‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14
Aon Benfield
About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.
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 2015. 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.
www.aon.com
Risk. Reinsurance. Human Resources.
