At a conference where industry experts bemoaned the low level of overall returns for the property/casualty industry across all lines, they reported even bleaker numbers for homeowners insurers, debating whether the carriers sealed their own fates by failing to raise prices.
Executive SummaryHomeowners insurers reported after-tax returns averaging 4 percent nationally over the last 10 years, with more disastrous results in some regions. Some industry observers say the carriers sealed their own fates by failing to raise prices.
Speaking during a panel discussion at the Property/Casualty Insurance Joint Industry Forum recently, Brian Sullivan, editor for Risk Information, Inc., reported that after-tax returns for U.S. homeowners business averaged just 4 percent over the 10 years ended 2012.
“That doesn’t cover the cost of capital. But when you look at the business and think about just how disgusting the last 10 years have been in terms of performance, that’s not really a disaster,” he said.
“That’s just a bad business. That’s not an epically disastrous business.”
(Editor’s Note: Investment dictionaries define the cost of capital as the rate of return that capital could be expected to earn in an alternative investment of equivalent risk.)
Brian Sullivan, editor for Risk Information, Inc.
Sullivan believes that homeowners insurers know more about their risks today than they did when they posted some of those results, but says they are still not pricing policies to reflect the risks they’re taking on.
“The best news,” he said, is that “if you look back over the last 10 years, we didn’t lose money,” he said, referring to homeowners insurers collectively. “We didn’t cover the cost of capital, but we didn’t lose money. And we did when we were frankly a whole lot dumber than we are today— and a whole lot dumber than we’re going to be over the next decade,” he said.
“We are at a point now where we can honestly say that information and data about the nature of risks and the nature of claims is exploding,” he said. Holding up a water glass, he said that what carriers knew about the homes and the commercial properties they were insuring a decade ago couldn’t fill it. “They really didn’t know the size, the quality, the makeup, the roofing. They didn’t understand the location. They didn’t understand most anything,” he said.
More knowledge of the properties and more specifics about claims will mean better information for pricing decisions, he said, predicting increased sophistication in pricing tools over the next decade. “The only missing piece is the [actual] price that gets charged,” he said, citing his analysis of NAIC data for the 19 years ended 2010, showing that the average homeowners premium went up 70 percent.
That may sound high, “but it’s only 7 percent a year in a business that has not returned the cost of capital,” he said. “Insurers have to charge more. It’s just not that complicated,” he concluded, citing arguments from insurers that include not being able to take more rate in states like Florida and the fear of losing market share by charging higher prices.
Accepting the argument about Florida, Sullivan said, there are still probably 44 states where everybody could just take more rate. But the market share argument “makes no sense,” he said. “Let me see if I have this right: You’re losing money on every policy you sell, or at least not covering the cost of capital, but you don’t want to raise the price because you’re going to lose customers,” he retorted.
Further admonishing homeowners insurers as a group, he warned that while the 10-year average premium jump was 7 percent per year, increases actually slowed down in 2008, 2009 and 20102—just before Irene and Sandy. “You got cocky. You had two or three good years and you said, ‘Everything’s fine.’”
“Everything is not fine. It’s a real mess—and prices need to get pushed as hard as they can without the regulators and the public screaming,” he said.
At a later session, John J. Bishop, chairman & chief executive officer of The Motorists Insurance Group, disputed Sullivan’s assessment of price discipline, but also said that results had been worse in some regions than those Sullivan had cited.
“Contrary to what we heard in the prior panel, the homeowners market in our region has been very distressed for the past 10 years,” he said, referring to a region that includes Ohio, Indiana and Kentucky, among others. “I believe our company is not alone in that we probably had one year of underwriting profit” in the last 10.
“Far from that 4 percent return that was quoted on a national level,…it wouldn’t be a stretch that the 10-year number is [a combined ratio] north of 115 in many states,” he said, adding that “pricing discipline has been critical.”
“We have seen more rate activity in the homeowners line business in the last five years than I’ve seen in any other period,” said Bishop, a 40-year veteran of the industry. “Even then, we’re talking about the largest loss leader,” he said.
Participating on the same panel as Sullivan, Eleanor Kitzman, Commissioner for Texas Department of Insurance, said: “It’s a political problem when it comes to rates. This isn’t any easy thing for consumers and politicians to understand, if they want to understand. And often they don’t want to understand. They just want their rates to be lower.”
Still, she called on insurers take Sullivan’s advice. “Don’t write it, if you can’t get rate. You really undermine your credibility when for years and years you’re losing money, but yet you keep writing,” she said, suggesting that consumers and regulators question the rationality of such actions.