Global ratings agency AM Best has revised its outlook for the U.S. homeowners segment to negative from stable, citing the deterioration of underwriting results, rising loss costs, inflation, firm reinsurance market conditions, and the retreat from catastrophe-exposed states.
AM Best notes that its negative outlook reflects a number of ongoing challenges that have served to weaken results in the segment.
While insurers have been contending with higher catastrophe activity, inflationary pressures, and rising reinsurance costs, more frequent secondary perils and higher retentions and co-participation given reinsurance pricing trends, have compounded headwinds for carriers.
The US homeowners segment suffered a net underwriting loss for the third year running in 2022, and AM Best expects the above-average level of cat losses in the first half of this year to pressure year-end 2023 underwriting performance.
“Going forward, homeowners carriers will find it difficult to absorb these underwriting pressures while strengthening their balance sheets. A return to underwriting profitability over the near term appears highly unlikely,” said Maurice Thomas, senior financial analyst, AM Best.
After some challenging years, reinsurers tightened terms and conditions throughout the 2023 renewals, with a particular focus on higher attachment points in order to move higher up the tower and away from frequency events, such as floods, wildfires, and severe convective storms. The active H1 catastrophe experience was driven by severe convective storms, and given the structural changes to treaties, primary insurers retained a greater share of the losses than in the past.
Further, this trend is poised to continue as reinsurers are expected to remain disciplined and not reverse any of the changes made during the 2023 reinsurance renewals, so it’s easy to see why AM Best doesn’t expect a return to underwriting profitability for the segment this year.
In response to market challenges, AM Best notes that carriers have generally addressed rate needs via both rate increases and inflation adjustment factors. However, while rate acceleration has continued in Q3 2023, maintaining rate adequacy remains a real challenge for companies, says the ratings agency.
Ultimately, AM Best expects challenges to continue to grow for insurers in cat-prone regions, driven by higher reinsurance costs, limited capacity, and tighter terms and conditions.
“AM Best believes that higher rates will persist over the near term,” explains the firm.
Offsetting the headwinds and negative pressures facing insurers in the U.S. homeowners sector, AM Best highlights the fact risk-adjusted capitalisation remains solid for most with sufficient liquidity, although the capital cushion has started to erode for some.
Technology adoption is also on the rise in the market, notes AM Best, which alongside improved catastrophe risk management practices could go some way to offset some of the challenges.
