US homeowner carriers can’t get leg up on rising costs over near-term
US homeowner insurers aren’t likely to turn the corner on rising claims and reinsurance costs with their ever-lagging attempts to hike primary rates, analysts at the AM Best ratings agency said while downgrading the outlook for the segment.
“A return to underwriting profitability over the near term appears highly unlikely,” AM Best analysts said, noting the third consecutive year of net underwriting losses in 2022.
Nat cat losses, including greater net exposure to secondary perils following the reinsurance market reset, lie at the core of losses. Severe convective storms, hurricane Idalia, wildfires in Hawaii and across Canada and flooding rain in California and the northeast US all in the first half of 2023 have all only suggested a new normal, AM Best suggested.
But inflation and supply chain disruptions accelerated the hit from loss cost “making it difficult to maintain rate adequacy.”
“Although rate momentum started accelerating in late 2020 and has continued into the third quarter of 2023, maintaining rate adequacy remains a significant challenge," analysts wrote.
Claims cost trends are sufficiently dynamic that the mere pricing of 12M policies leads to rate adequacy challenges, AM Best noted. “As a result, the impact on reported results will be moderate over the near term.”
Cost trends in reinsurance both double down on the claims cost pressure and open the primary carriers to increased earnings volatility. Those conditions “will persist over the near-term.”
Comments come part and parcel with a move by AM Best to downgrade the outlook for the homeowners segment from stable to negative on account of the deteriorating underwriting performance.
But for most players, that is just an outlook. Current risk-adjusted capitalization remains “solid” for most homeowners insurers and most companies remain “vigilant” in pursuing rate adequacy. Capitalization of some insurers, particularly in cat-exposed areas, “has started to erode” following repeat losses in recent years.
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