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Best’s Special Report: U.S. Homeowners’ Segment Challenges Stress Carrier Operating Results

Elevated frequency of natural catastrophes and secondary perils in the first half of 2023 continue to drive deterioration within the U.S. homeowners insurance segment’s financial results, according to a new AM Best special report.

These issues affecting the segment’s underwriting results are being exacerbated by rising loss costs, inflation, and supply chain disruptions that continue to pressure earnings, making it challenging for homeowners’ insurers to maintain rate adequacy.

The Best’s Market Segment Report, “Homeowners Carrier Challenges Stress Operating Results,” notes that AM Best recently revised its outlook on the U.S. homeowners’ market segment to negative from stable. Key factors supporting that change include pressure on regional earnings from elevated catastrophe activity, increased frequency of losses from secondary perils, inflationary pressures on prevailing claim costs, challenging reinsurance market conditions, and higher retentions and co-participation levels given reinsurance pricing trends.

“AM Best expects year-end 2023 underwriting results to remain under pressure for this segment,” said David Blades, associate director, AM Best. “A return to underwriting profitability over the near term appears highly unlikely. Segment carriers will find it difficult to absorb these underwriting pressures while attempting to strengthen their balance sheets.”

The volatile results from some of the country’s largest markets, such as Florida, California and Texas, are having a profound effect on the homeowners’ line performance nationwide. Several market leaders in the most populous states have curtailed new business, citing escalating construction costs, heightened catastrophe risks, and a difficult reinsurance market.

The U.S. homeowners’ segment reported $6.34 billion in underwriting losses in 2022, marking its third consecutive year with a negative result. The segment’s combined ratio of 104.5 in 2022 was slightly elevated compared to the 20-year average of 101.7; it also represented the fifth time in six years that it has exceeded the 100.0 breakeven point. “Despite these challenges, risk-adjusted capitalization levels remain solid for most insurers with sufficient liquidity,” said Maurice Thomas, senior financial analyst, AM Best. “However, the capital cushion has started to erode for some insurers.”

Companies remain vigilant in assessing their rate needs, pushing for increases when pricing is inadequate. The report notes that such efforts are neither simple to execute nor accomplished expediently. The process for state departments of insurance to approve carrier rate increase requests has become a vital component of homeowners’ market dynamics. Insurers in states predisposed to catastrophe risks will likely struggle with the economic viability of providing homeowners’ coverage, according to the report.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=336072.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2023 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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