U.S. Home Insurers To Take Underwriting Losses

The US homeowners insurance industry will report a modest underwriting loss in 2008 as rates fall due to excess capacity, an abundance of reinsurance options as well as regulatory and political pressures, Fitch Ratings says. In a new report on the industry, Fitch notes that although insurers have experienced improved underwriting results over the past six years, market fundamentals have deteriorated recently.

The industry failed to produce an underwriting profit for 15 years prior to 2003. Fitch believes that poor underwriting results in the homeowners
business originated from the line serving more as a “loss leader” to attract automobile insurance business for many insurers. Other explanations for underperformance include artificially low prices to increase market share and a lack of sophistication regarding catastrophe management.

State Farm and Allstate (ALL) represent the two largest homeowners writers, with 35% of total homeowners premium, but performed worse than the average for the top 10 writers over the past five years. The longer term underperformance by State Farm and Allstate can be attributed to greater catastrophe exposure, which has since been addressed by both companies with more robust reinsurance and risk management programs.

The major writers of homeowners insurance appear well positioned from a balance sheet perspective as market pricing softens and catastrophe exposure continues to grow.

Underwriting performance in homeowners is likely to further deteriorate into a larger underwriting loss through 2009 as there are no indications that market competitiveness in the broader insurance industry is abating.

The key factor looking further ahead is whether insurers will revert to the past loss leader approach to homeowners as competition and growth challenges mount in their other personal lines business.

The full report titled Homeowners Insurance Market: Challenges Ahead, Best Years in the Past is available for purchase.