Despite strong rates, profitability is a struggle for US homeowners insurers, says Aon

Global insurance and reinsurance broker Aon has revealed that the prospective return on equity (RoE) for US diversified homeowners insurance carriers decreased by 100 basis points to 5% from last year, despite the significant rate increases achieved by carriers in 2023-24.

Aon’s Homeowners Return on Equity Outlook – October 2024 report analyses state and aggregate statutory filing data to estimate the prospective RoE for US homeowners business.

The conclusion of the report shows that over half the states under review produced negative RoEs for homeowners carriers, with nearly all states producing a carrier RoE below the 10% cost of capital hurdle after investment gains. This, according to Aon, means it is unlikely that many insurers reported positive pre-tax income for writing US homeowners policies.

The study suggests that at prospective 2024 rates and before income taxes, homeowners insurers in the US keep about 1% of profit for every premium dollar they earn. That direct profit must be shared between the primary carrier, reinsurance partners, and the U.S. Treasury.

These dynamics highlight the continued poor underwriting profits over the past decade for the segment, driven by increased insured losses from secondary perils like severe convective storms (SCS).

Other factors, according to the broker, are the lower than previously expected lifespan of asphalt shingle roofs and their poor wind performance in windstorms including SCS events; and deductible increases not keeping pace with Total Insurable Value (TIV) increases, leading to greater net exposures for carriers.

Aon warns this lack of consistent returns could deter the commitment of new capital to homeowners business, as it urges insurers to identify sources of capital and quantify the appetite for that for various forms of risk.

Paul Eaton, Head of US Actuarial of Aon’s Strategy and Technology Group, said: “The headline ROE numbers fail to illustrate the wide range of outcomes realized by insurers offering homeowners policies, and we expect insurers will earn meager ROEs insufficient to support the underlying risk. Our data show that both policyholders and insurance carriers need to consider tools for loss mitigation and reduction for the line to find a long-term profitable equilibrium.”

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