Homeowners Segment Well Capitalized but Weather Events Pose Significant Uncertainty: AM Best

The homeowners insurance segment in the United States has generated operating profits in three of the last five years, with a net profit of nearly $2.5 billion expected in 2021. However, according to a new AM Best report, the segment could face challenges, with Hurricane Ian affecting 2022 results.

Source: AM Best | Published on October 4, 2022

Homeowners Insurance
Fannie Mae and Freddie Mac rules

“U.S. Homeowners Line Well Capitalized but Weather Events Pose Significant Uncertainty”

Despite above-average catastrophe activity in 2021 and challenging market conditions, the segment's combined ratio improved by nearly four points to 103.8 in 2022, according to AM Best's Market Segment Report, "U.S. Homeowners Line Well Capitalized but Weather Events Pose Significant Uncertainty." Growth in net premiums earned outpaced growth in loss and LAE expenses, driving the improvement; catastrophes remain the primary driver of underwriting volatility in the line.

“Pricing sophistication, exposure management and risk selection has benefited profitability among the top writers, and insurers have taken prudent underwriting actions and devoted significant resources to limit the impact of volatile weather patterns on results,” said Maurice Thomas, senior financial analyst, AM Best.

According to the report, losses from so-called secondary perils have been growing at a faster rate than losses from primary perils. Because these perils have not been modeled as long or as thoroughly as primary perils, reinsurers have either been conservative in their capital requirements or demanded higher returns, resulting in pricing increases. Prior to Hurricane Ian, the most expensive 2022 event, with $2.2 billion in damage, was an April tornado outbreak across the Southern United States.

AM Best maintains a stable outlook on the homeowners insurance market segment in the United States, citing strong risk-adjusted capitalization for most insurers, disciplined underwriting, and increased technology use. However, the report states that inflation and supply chain disruptions, as well as higher reinsurance pricing, continue to be headwinds. All of these issues are most visible in Florida's property insurance market, where four Florida-based property insurers and a Louisiana-based company that wrote property business in the state have been declared insolvent since late February 2022; now the market must contend with a major hurricane.

“The reinsurance market has become more selective in taking on Florida exposures due to local market forces and higher exposure levels, creating an existential challenge for many of the primary carriers there that depend on reinsurance,” said David Blades, associate director, industry research and analytics, AM Best. “At the same time, the growing number of wildfires across the United States, as well as perils such as convective storms in the Midwest, have only deepened this conservatism among reinsurers.”

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=324437.