27 Sep Outlook on U.S. homeowners’ insurance market downgraded from stable to negative
By Anita Byer, Setnor Byer Insurance & Risk
Buying homeowners’ insurance has become a pain in the you know what. It keeps getting harder for homeowners to find adequate and affordable insurance in a market with dwindling coverage options and surging prices. Unfortunately, it is starting to look like things may get worse before they get better. AM Best, a global credit rating agency specializing in the insurance industry, recently downgraded its outlook on the U.S. homeowners’ insurance market segment from stable to negative.
According to AM Best’s Market Segment Outlook: US Homeowners (9/18/2023), the downgraded outlook was prompted by three consecutive years of net underwriting losses in the homeowners’ sector and other ongoing market challenges. Under current market conditions, AM Best believes that it will be highly unlikely for homeowners’ insurers to achieve underwriting profitability over the near term. This is concerning because, like it or not, insurance companies cannot survive without profits. One way for insurers to achieve profitability is to increase revenue by charging higher premiums. Another way is to reduce underwriting losses by refusing new policies or non-renewing existing policies. Either way, homeowners are left with fewer options and higher prices.
AM Best identified various market conditions to support the decision to issue a negative outlook for the U.S. homeowners’ insurance segment.
More billion-dollar weather and climate disasters. Catastrophic weather and climate events are happening more often than before. According to the National Oceanic and Atmospheric Administration, the U.S. experienced 18 separate weather and climate disasters costing at least 1 billion dollars in 2022. It was the eighth consecutive year in which 10 or more separate billion-dollar events impacted the U.S. For context, the 1980–2022 annual average of billion-dollar events is 8.1.
AM Best’s negative outlook on the homeowners’ market is due in part to the increasing pressure felt by insurers due to the recent above-average catastrophic activity. It is also unclear whether the increasing frequency and severity of catastrophic weather and climate events should be viewed as above-average or the new normal. Unfortunately, recent NOAA data tends to support the latter view. As of September 11, 2023, there have already been 23 confirmed billion-dollar events.
Secondary perils becoming loss drivers. Losses from secondary perils from natural catastrophes are approaching, sometimes exceeding, losses caused by primary perils, like earthquakes and hurricanes. Secondary perils are the secondary effects of a primary peril, such as hurricane-induced flooding. Secondary perils also include independent, high-frequency, low-to-medium severity events, like river flooding, thunderstorms and landslides.
According to Gallagher Re’s Natural Catastrophe Report (Jan. 2023), “the topic of primary versus secondary perils has taken on heightened significance in recent years as these so-called secondary perils—marked by higher-frequency/lower-cost events—have shown accelerating loss growth and often aggregate to higher annual totals.” AM Best’s negative outlook was due in part to the recent emergence of secondary perils as primary loss drivers.
AM Best noted additional market conditions in support of its negative outlook, including elevated reinsurance costs, economic pressures, rising loss costs, inflation and supply-chain disruptions. Until these conditions improve, homeowners will have to endure a homeowners’ insurance market with limited options and high prices.
Please contact our team of experienced and responsive insurance and risk management professionals to find affordable options to protect your home and your business during in a hardening insurance market.