Poor stepchild HO market about to smarten up

It’s worth $53 billion a year but the homeowners insurance market is largely unsophisticated and unloved, according to Brian Sullivan, editor of Risk Information Inc., which publishes the Property Insurance Report. That may be about to change. In this exclusive interview with Insurance Journal’s Andrea Ortega-Wells, Sullivan discusses the HO market’s attempt to catch-up.

Some homeowner insurers appear to be moving capacity away from the coast to the interior U.S. Will this continue and will rates in the middle of America drop?

Sullivan: People want more of that business. Companies cover their expense ratio with less volatile customers, less volatile policies. The second reason is they are making so much money. You can’t take a rate increase when you are running a loss ratio in the ’50s. Rates can’t go up; they have to go down at least a little even in a marketplace like this. The remarkable thing is not that rates have dropped; it is that they haven’t dropped more. … The primary one [reason rates haven’t dropped more] is that no one is really in love with homeowners, even in the non-cat zones. There’s a pervasive feeling among insurers that this is a dangerous business to be in. … As a consequence they are sitting there with sometimes astonishing profits with no interest in more business. It’s a very unusual time in that market.

Why wouldn’t they wish to grow their HO market share?

Sullivan: They are fearful of unknown risks which homeowners has proven time and time again that it can deliver. It’s not just coastal risks. … The same is true of other coastal areas that were considered somewhat remote hurricane risks. New Jersey comes to mind. Then the secondary issue is there’s a fear of getting caught up in floods. This debate over flood vs. wind in Mississippi especially has insurers wondering about their safety in claims related to flood. You’ve got hail; you’ve got tornadoes. Although these aren’t risks that anyone could measure on the same scale as hurricanes, they are still scary to people. I think it’s somewhat irrational. I think a company that decides to be aggressive in homeowners almost can cherry-pick the lowest risk customers and make an awful lot of money on it and grow like crazy. You don’t have to go to Florida to get that business because no one is fighting in Iowa.

Is it a fear of something else hitting the market, like mold?

Sullivan: That’s an excellent point. In addition to weather related risks you get these other little surprises like mold, which was not a national phenomena but nevertheless if you told me two years before it took off in Texas that it was going to devastate the Texas market, I would have no indication that that would have happened. There was no predicting. So there’s this very real sense that there are real risks that they don’t understand.

[T]he homeowners market is remarkably unsophisticated. If you think about how hard insurers work to accurately assess auto insurance risks, looking at thousands and thousands of possible factors and relationships, when you ask the same questions about how they go about doing it in homeowners, you are looking at skill sets that have not changed much since the ’60s and ’70s. It’s just not a very sophisticated market. One reason companies are so fearful of homeowners is they really don’t know what they are doing. They don’t know what risks they face. So they can’t accurately identify a low risk home from a high risk home. This is changing. This is going to change pretty rapidly over the next couple of years and it is already underway.

Why has it taken homeowners insurers so long to catch up?

Sullivan: One of the reasons it remains unsophisticated, and this sounds trite but it’s very true, is it is not a cool business to be in. It’s not sexy. If you work for a big personal lines insurer the hot jobs are in the auto side because that’s where the money is, right. And if you wind up stuck in homeowners, it’s not a good thing for your career. … There’s no other property casualty line larger than homeowners except for auto. Why $50 billion isn’t sexy enough, I don’t know. But it’s because it’s written by companies that also write auto and as a consequence, it winds up sort of the poorer stepchild.

Do you see a trend in the next couple of years that’s worth noting in the homeowners market?

Sullivan: The whole thing hinges on whether or not a company decides to attack, if the company says that because of the overall reluctance to write business, we can go in and write selectively pretty much anywhere we want, if we are aggressive, especially if we apply greater sophistication in our risk assessment. Somebody is going to grow faster than everybody else and make more money — which P.S. smells a lot like Progressive 10 years ago. They grew faster and made more money, which is kind of weird. Usually you grow fast but you lose money. Well, this is an opportunity just like the auto opportunity where you can grow faster and make more money. That will create a chain of events that will change the market place. But as long as everyone is afraid, I think the market will pretty much stand in place and prices will drift down here and there in non-cat zones and will continue to rise in cat zones.

The other possible market shock would be if a company, and Allstate would be a classic example, decided to withdraw even more aggressively from cat zones. The withdrawal of capital could precipitate a major change. Everyone seems to be moving pretty carefully right now. But again, if someone just said, ‘OK, we’ve had it’ — some top 5 homeowners insurer for example. I don’t think that will happen because they are all making so much money it would be incredibly hard to walk away.

Topics Trends Carriers Auto Homeowners