Conning Research: Challenges Looming for Homeowners Insurance

October 8, 2008

The five-year period spanning from 2003-2007 served the homeowners insurance line favorably after the dismal 20-year period that preceded it, and return on surplus for the line averaged an estimated 11 percent for those five years. But while returns relative to risk still do not compare favorably with other major lines, this five-year period did represent a marked improvement in financial performance for the line, says a new report by Conning Research and Consulting.

According to Conning Research, underwriting profitability for the homeowners insurance line was driven by improving loss costs and strong premium growth. A steady decrease in claim frequencies during this period combined with very light catastrophe years in 2006 and 2007 to provide a big boost to the line. Yet even in 2004 and 2005, when catastrophic events were a significant factor, improved catastrophe management on the part of homeowners insurers produced better results than history would have predicted. Homeowners insurance premium growth was driven by strong price improvements and equally strong exposure growth.

Yet, in its new study, Conning Research predicts the immediate future for the homeowners insurance line may not be as favorable.

“Looking ahead, the uneasy state of the U.S. economy creates a series of challenges for homeowners insurers over the next several quarters — and likely the next few years,” said Alan Dobbins, analyst at Conning Research & Consulting. “Conditions in the housing market will suppress growth as long as inventories remain at elevated levels and as values decline. Insurance-to-value will be adversely affected, and the threat of inflation could increase the cost of the average homeowners claim in the wake of declining premiums.”

The Conning Research study, “The Homeowners Insurance Market: The Eye of the Storm,” analyzes the economic and regulatory pressures on the line, as well as issues related to catastrophe management and distribution changes that will have profound effects on homeowners insurance in the coming years.

While homeowners insurance distribution has traditional gone the route of independent and exclusive agency channels, conditions are changing, say Conning Research analysts, possibly paving the way for a change in the way homeowners accounts are acquired.

“Changes in technology and in the relative importance of this line to insurers make such a change more likely. Significant challenges for such a shift remain, but the success of various insurers in reconfiguring the distribution function highlights the possibilities of such a shift from traditional methods,” the report said.

“With the increased pressures on the homeowners insurance line associated with both the economy and regulatory issues, it is clear that insurers will need to manage carefully through the next few years,” said Stephan Christiansen, director of research at Conning. “Our research indicates that those insurers who have innovated in technology and are willing to innovate in policy simplification and more sophisticated pricing approaches will be at a significant advantage in this challenging environment.”

Source: Conning Research & Consulting,

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