A home insurance company crisis can happen in the U.S. within the next ten years if insurers are not allowed to charge higher rates that enable them to operate at profitable levels, according to a study conducted by Aon Benfield, a reinsurance brokerage owned by Chicago-based Aon.
The study showed that the projected return on investment this year dropped by 0.4 percent, making house insurance a losing option for investors. Aon Benfield said that the ROE for house insurance products dropped to 6.1 percent in August 2009 from 6.5 percent in August last year.
Aon Benfield said that if insurance firms cannot show reasonable ROE levels for the home insurance line, private capital investors who have been pouring their money into the home insurance market will withdraw and look for more profitable insurance product lines.
According to Aon, this low ROE level has forced many home insurance companies to leave some states and to stop issuing certain riskier home insurance products. As a result, the study added, state governments have been taking over, issuing insurance policies in insurance lines and in geographical areas where home insurance company enterprises refuse to sell house insurance policies.
As states often cannot afford to sustain increasing insurance liabilities, they eventually turn for financial assistance from the federal government.
Bryon Ehrhart, CEO of Aon Benfield, further explained that it is surprising that state governments continue to block insurance companies from rising from their huge losses during the catastrophe years and replenish the huge capital they have lost.
The report, however, recognized that home insurance companies in some states are operating profitably, but in other states, insurers have been struggling.
Prospective rates of return in Washington, D.C. and in four states are more than 10 percent, while the ROE in states like California, Massachusetts and Mississippi was lower than 2.5 percent.
Aon Benfield estimated that home insurers need to increase their rates by over 26 percent so they can realize a 14-percent rate of return. In hurricane-prone Florida, rates need to increase by nearly 94 percent while in North Carolina, an increase of nearly 2 percent is adequate.
Along the Gulf Coast and the East Coast which are prone to hurricanes, rates need to increase by around 36 percent to realize a 14-percent ROE. For the remaining regions, rates need to rise by more than 15 percent to enable home insurance company enterprises to realize a 14-percent rate of return.