The global macroeconomic picture continues to “exude turmoil” with negative impacts to homeowners insurers, Aon has said as part of its new Homeowners Return on Equity report.
Analysts noted that the inflationary environment has had significant implications for reinsurance market capacity and utilization.
Inflation adjusted values and claims payments drove both modelled and actual losses into excess reinsurance layers, and the market responded with hardening prices and risk appetite adjustments.
And Aon anticipates that the homeowners insurers under examination in its latest report will continue to face these headwinds through 2023.
The report shows that, for the cohort in question, homeowners insurers increased their equity holdings from 20% to 27% of surplus over the past 10 years.
Likewise, alternative investments grew from 6% to 8% of surplus because the historically low fixed income yields and limited underwriting profitability pushed them into higher volatility assets in search of returns.
Aon now believes a 12 %or higher ROE hurdle will be appropriate for insurers trying to attract capital in a higher yield environment than what was experienced in the 2010-2020 window.
Additionally, rate shocks and abrupt migration to higher interest rates are set to depress the value of the large amounts of fixed income AAA and Treasury instruments property insurers like to hold in significant quantities.
The net consequence of these changes is that aggregate total surplus for Aon’s cohort is down from $282 billion at December 31, 2021 to $255 billion at July 1, 2022.
But Aon was positive on re/insurers’ ability to keep up with inflation, noting that inflation guard features on policies have generally worked as designed, with cohort members typically achieving double digit coverage value increases via their inflation guard mechanisms.