A study by Aon Re shows that average expected results for homeowners' insurance in hurricane-prone US states are insufficient to cover the cost of capital.
Aon Re said that even before Hurricane Katrina made landfall, homeowner insurers in coastal states knew their returns were insufficient to sustain the capital required to support the growing exposure to catastrophes.
Randall Brubaker, head of the rate-making support practice of Aon Re Services, said: "Many factors combine to create the continual need for higher premiums from homeowners in coastal states.
"These include constant population growth on concentrated coastlines, increasing home sizes and values, expansion of cover through changing interpretations of policies or statutes, and an increase in the frequency of hurricanes making landfall."
While these factors generate higher premium requirements, strong resistance from regulators and consumer advocacy groups artificially delay the inevitable rise in premiums for policyholders and accelerate insurer downgrades and insolvencies.
After Hurricane Katrina and the four significant hurricanes of 2004, the underlying assumptions about the frequency and severity of storms will be adjusted by insurers to reflect their experience and expectations for the future.
Capital levels have deteriorated so significantly for homeowner insurers that operating results must now generate new surplus to support even current risk levels. Coastal states insurance results are far from returning the cost of capital required to support operations.
The report says that new underwriting strategies that better incorporate the component costs of catastrophe risks, including more conservative views of the uncertainty associated with such risks, will be formulated over the course of the next year, particularly in hurricane-prone states.
