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Homeowners' ROE Outlook Growth. Divergent Markets. Technological Innovation. October 2017 Aon Benfield

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Page 1: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

Homeowners' ROE OutlookGrowth. Divergent Markets. Technological Innovation.

October 2017

Aon Benfield

Page 2: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

Homeowners ROE Outlook 2017

Homeowners: Growth. Divergent Markets. Technological Innovation. The estimated prospective ROE for homeowners this year is 4.5 percent, down from 6.7 percent in 2016. There are

three key themes to note about homeowners insurance in 2017:

Growth

The homeowners line of business continues to grow;

premiums have increased to USD91 billion in 2016 from

USD89 billion in 2015. The rate of growth has slowed

from prior years and slower growth is expected in

the near future with less aggressive but positive rate

change in the pipeline. Further, catastrophe losses are

rising faster than inflation and coverage gaps continue

in perils, like flood, suggesting opportunities exist for

carriers to find premium through coverage innovations.

Divergent Markets

From the macroscopic perspective of this study, there

are at least three different homeowners markets:

1. Florida, a market unto itself. Eight of its ten largest

carriers have limited name recognition outside the

Florida market, though several are expanding to other

coastal states. Remove Florida and US ROE increases to

9.1 percent, suggesting the assumptions of this study

(nationwide carrier with A.M. Best “A” rating) differ

from market reality in the sunshine state.

2. The hurricane exposed coast, excluding Florida.

Hurricane coast states posted an ROE of 6.7 percent

in this year’s study. At present, these states are

characterized by heavy regulation, strong competition

between established brands vs. younger carriers, and

sophisticated risk differentiation based on granular

catastrophe-savvy rating plans.

3. Everybody else. The remainder of the US owns a

respectable 12.2 percent ROE with market share

largely dominated by big-name national and super-

regional brands. Regulatory considerations are easier

to navigate than in coastal states. Catastrophe risk has

unique challenges associated with less robust models for

thunderstorm, wildfire, and flash flood risks compared

to hurricane. California and Washington are unique due

to their strict regulatory environment, but otherwise

resemble the other states in the cohort in terms of

perils and players of note in part because earthquake

endorsements are not required for home loans, show

limited take-up, and are ultimately excluded from this

analysis because they roll up to the earthquake annual

statement line.

Technology

This year’s study examines “one dollar of homeowners

premium”, which highlights 8 cents of loss adjustment

and 21 cents of policy acquisition costs (12 cents for

commissions and brokerage plus 9 cents for other

acquisition costs). These areas of the value chain are

coming under attack from InsurTech startups eager to

test established carriers’ ability to adapt rapidly evolving

technology. Aon’s Digital Monitor currently tracks over

forty startups backed by nearly USD2 billion in venture

capital attacking these areas of the property and

casualty value chain (not all in homeowners specifically).

Mobile and software-as-a-service platforms, drone and

satellite imagery, and proprietary catastrophe-detection

internet-of-things enabled hardware promise to

continue to apply pressure to traditional homeowners

carriers’ approach to the business of insurance.

To learn more about the impact of technological innovation

in the insurance sector, view the 2017 Global Insurance

Market Opportunities study at http://aon.io/gimo-2017.

ContactsPaul [email protected]

Parr [email protected]

Robert [email protected]

Page 3: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

Homeowners ROE Outlook 2017

Countrywide ROE estimate: 4.5%

August 2017 prospective ROE at current rates

ROE study methodology

The basis of the prospective ROE estimate is 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.

The normalization of catastrophe by this study replaces the local impacts from large events like Harvey, Irma, or the first and second quarter hail and wind losses experienced in 2017 with the modeled catastrophe average annual loss. The prospective impact to the line from these events remains to be seen and future versions of this study may attempt to measure impacts to rate level and reinsurance pricing.

Prospective ROE percent

Less than 00 to 34 to 67 to 910 and above

Change in prospective ROE from previous year

2016prospective

ROE

-1.1%-0.5% -0.6%

+4.5%

Attritional & catastrophe loss

changes

Increasedexpenses

Volatility &capital costs

2017prospective

ROE

0%

2%

4%

6%

8%

10%

6.7%

The 2017 nationwide ROE estimate of 4.5 percent falls below our 2016 estimate of 6.7 percent. Profitability challenges to the line include (1) a slowdown of rate increases (and decreases by some major carriers) that failed to pace loss and expense inflation and (2) premium and exposure growth that pushed up the A.M. Best capital requirements to maintain the assumed “A” rating. Declining costs of reinsurance to capitalize the volatility inherent in the homeowners line were insufficient to offset the increased capital charges. Softening reinsurance costs cumulatively added over 210bps of ROE in our study since 2013; after the catastrophe losses of 2017, the reinsurance and capital markets will be closely watched for pricing signals.

Page 4: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

-3-1

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Countrywide: -10%

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Countrywide combined ratio: 91%

Direct combined ratio to achieve a 10 percent return on allocated capital

The percentages in the map on the left show the direct target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and non-catastrophe risk. The targets are for a sample of nationwide companies 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: (1) Florida, (2) other hurricane exposed states, and (3) states not materially exposed to hurricanes.

The five year retrospective comparing catastrophe experience to modeled expectation is favorable for much of the country. States on the eastern slopes of the Rockies into the plains, including Colorado, Nebraska, and Montana, experienced pain primarily from hail driven losses in several of the last five years. Texas is an interesting case study because the lull in hurricane activity drives overall favorable experience overwhelming thunderstorm losses that contributed to a five point drag on the loss ratio.

The five year averages reflect the period 2012 to 2016. Across the country, the first two quarters of 2017 experienced the highest thunderstorm loss levels since 2011 and the third quarter included multiple major landfalling hurricanes. Taken together, this should partially erode the favorable experience of the previous five years.

Five year Property Claim Services loss experience vs. modeled average annual loss

Ten year Property Claim Services loss experience vs. modeled average annual loss

Combined ratios

Less than 8080 to 8586 to 9091 to 9394 and above

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 state level adjustments can be significant, the ten year nationwide experience catastrophe loss ratio of 13 points is meaningfully lower than the modeled expected catastrophe loss ratio of 23 percent.

2016 ended the dearth of hurricane activity that was the boon of gulf coast carriers for nearly ten years. The gulf states plus Florida had 30 points of favorable results relative to expected from 2007 through 2016, and as of the time of this publication, even with Harvey and Irma, that favorable experience is more than 24 points of performance lift.

Less than -10-10 to -4-3 to 34 to 910 and above

-13-12

-16

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-6

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6

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-12

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-20-23

-13

-7

-9

-12

-6

-23

-7-13

-56

-11

0

-4

-6

-35

-5 6

-5

-8-7

18

Countrywide: -12%Less than -10-10 to -4-3 to 34 to 910 and above

Loss ratio points

Loss ratio points

Page 5: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

Aon Benfield

Premium growth and rate change, 2010 to 2017

Homeowners as a growth engine continues to be the headline for the insurance industry through 2016 as the line has outpaced GDP and most other underwriting segments since 2010. Direct written premiums increased from USD71 billion in 2010 to USD91 billion in 2016 with a projected USD93 billion for 2017 given prospective rate activity.

A strong component of growth through 2015 was an emphasis on rate adequacy with indicated rate levels increasing over 30 percent since 2010. Policyholders changing carriers will prevent the industry from realizing the full aggregate benefit of the individual carriers’ rate actions.

The “S” shape of the rate change curve suggests the line should be watched carefully. The rate activity through 2015 is now fully earned and rates since 2015 show more modest increases. Time will tell if rate increases around two percent will suffice to track loss and expense inflationary pressures.

Our study suggests that, at prospective 2018 rates and before income taxes, insurers keep slightly more than four cents of profit for every premium dollar they earn. The four cents of direct profit is shared between the primary carrier, reinsurance partners, and the US Treasury.

Homeowners average approved rate change

The map on the left shows average approved rate changes filed between January 2016 and August 2017 for the top 20 homeowners groups by state that made a filing in the period. Rate activity, while still positive, continues the slowdown observed in last year’s study. Notable decreases came from at least one large industry carrier suggesting potential divergence in pricing levels that the averages fail to reflect. Rate changes on the coast, including Florida and Texas, ticked up significantly versus observations from last year. For Florida in particular, rate activity was likely insufficient to on-level for assignment of benefits and claims adjustment issues facing the state’s carriers.

One dollar of homeowners premium

32

4

4

2

7

2

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6

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33 2

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3

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12

5

6

3

2

4

-1

2 2

5

12

5

Countrywide: 3%

Approved rate changeLess than 00 to 12 to 34 to 5 6 and above*Rate filings not available

Attritional loss37¢

Catastrophe loss23¢

Policy acquisition21¢

TLFs2¢

LAE8¢

G&A4¢

Profit4¢

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1.121.20

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77.882.6

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20172016201520142013201220112010

Page 6: Homeowners' ROE Outlook - Aon Benfieldthoughtleadership.aonbenfield.com/...analytics-homeowners-roe-outl… · Homeowners ROE Outlook 2017 Homeowners: Growth. Divergent Markets. Technological

About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

About Aon BenfieldAon 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 2017. 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 profes-sional advice after a thorough examination of the particular situation.

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