Seen at Insurance Journal:
The countrywide prospective return on equity for the homeowners line of insurance for 2007 is 7.0 percent, up from 5.4 percent in 2006, according to an analysis by Aon Re Global, a unit of Aon Corp. The year-over-year improvement in prospective ROE is due to marginally more adequate homeowners insurance rates than in 2006 and an expected lower cost of reinsurance, the analysis found.[...]
As in 2006, a significant difference in prospective ROE is found between “hurricane states” and “non-hurricane states”—at 5.4 percent versus 8.7 percent respectively.
Let’s see…as I write this, BankRate indicates that you can get a 5%-ish return on a jumbo CD, and there are plenty of low risk investments where returns of better than 5.4% are possible.
That information adds a bit more fuel to the heat some insurers feel when it comes to writing homeowners coverage in hurricane-prone markets. If you’re going to earn 5.4% in a good year, when equivalent or better returns are possible in safer investments, why the heck would you want to play in the market?
I’m sure that consumer advocates will be by shortly to criticize the study, referencing “record profits” by the industry, without acknowledging that for many insurers, the decision of whether to offer a line of business in a given market is largely independent of what else it writes, or where else it offers coverage—i.e., each product in each state needs to beat the hurdle rate mostly on its own.