When the rising cost of property and catastrophe reinsurance in the United States is cited as a factor impacting insurance affordability, critics should remember how poorly US residential property insurance underwriters have performed.
Reinsurance pricing is frequently criticized as having a negative impact on the affordability of homeowner insurance in the United States, particularly in catastrophe-prone states such as Florida and California.
However, given how unprofitable the homes insurance sector has become, the rise in reinsurance pricing is hardly surprising.
AM Best, a rating organization, reported today that last year the US homeowner’s insurance category had its poorest underwriting performance since at least 2000.
In fact, the segment experienced a $15.2 billion underwriting loss in 2023, more than doubling the losses witnessed the previous year.
AM Best indicated that the 2023 loss was the biggest of the century, with $14.8 billion in losses in 2011 being the next largest figure.
The rating agency says that continuous population transfers to disaster-prone regions of the United States is a major cause.
“The U.S. population grew 7.4% between 2010 and 2020, but 10.2% in the South and 9.2% in the West,” said David Blades, associate director, Industry Research and Analytics, AM Best. “Population trends show residents increasingly moving toward regions that are more prone to hurricanes, severe convective storms or even wildfires.”
However, it is not only population shifts that are driving loss potential higher in catastrophe-prone locations, but also the increasing values-at-risk of natural disasters and severe weather, with inflation acting as a further driver.
“A growing population means an even larger rise in real property development and thus in insured values,” said Christopher Graham, senior industry analyst at AM Best. “Construction in disaster-prone locations increases flood danger. It also increases the risk of wildfires in prone areas due to human activities and utility companies.”
According to AM Best, the direct combined ratio for homeowners insurance in 17 US states in 2023 exceeded the breakeven point of 100.
Except for 2019 and 2021, the number of states reporting underwriting losses has always been in the double digits since 2017. AM Best indicated that prior to 2017, the count was regularly in the single digits.
According to the ratings company, “this increase is more evidence of the impact that climate risks and population migration has had on the homeowners segment’s results.”
AM Best stated that loss ratios are likely to remain pressured, citing the more challenging reinsurance environment, which is clearly a response to insurers’ poor performance as well as the fact that more losses were previously being passed on to reinsurers, prior to the reset in reinsurance attachments and terms that occurred in recent years.
To emphasize how terrible things are in the US homes insurance category, AM Best stated that “a return to underwriting profitability for the segment over the near term is unlikely.”
Which, for reinsurance companies and ILS fund managers, makes partner selection and coverage terms important.
It is unfair to paint all US homeowners writers with the same brush, as many produce lucrative underwriting outcomes. However, ensuring a proper loss allocation between primary insurers and reinsurance capital is critical.
Another essential point is that there will be no return to soft market terms and circumstances with very minimal attachments.
It is critical to examine the factors driving increased reinsurance costs and harsher coverage terms, one of which is the unprofitable performance of homeowners’ books of business.
While this presents a challenge for primary insurers, demonstrating the long-term profitability of portfolios is necessary to encourage improved pricing and terms from capital sources.
As a result, capital and capacity partnerships may become increasingly important in the future, allowing reinsurers and ILS funds to have a better understanding of how homeowners’ businesses perform, which should help reinsurance buyers when renewals come around.