HOMEOWNERS PROFITABILITY

1
HOMEOWNERS PROFITABILITY

• Jeffrey L. Kucera, FCAS
• 2003 CAS Annual Meeting
• New Orleans, Louisiana

2
WHY DONT COMPANIES LIKE HOMEOWNERS?

• Results fluctuate too much.
• Has been unprofitable in recent years.
• Catastrophe exposure.
• Requires a substantial capital investment.
• Coverage too broad.

3
CONNINGS INDUSTRY INSIGHT

• Second largest line for Property-Casualty
  Insurers 2002 Net Premiums of 40.3 Billion.
• State Farm, Allstate and Farmers account for
  45.1 of the industry total.

4
CONNINGS INDUSTRY INSIGHT

• Unprofitable 19 of the past 21 years ending in
  2002.
• 10 times between 1991 and 2002 the combined ratio
  has exceeded 110.
• Minimal investment income.
• ROE has remained negative since 1992.

5
THINGS MAY BE LOOKING BRIGHTER!
6
WHY ARE THINGS LOOKING BETTER?

• Aggressive Rate Changes
• Tightened Underwriting
• Coverage Restrictions

7
COMPANY RESULTS

• State Farm
• 2001 Loss Ratio87.9
• 2002 Loss Ratio73.1
• Allstate
• 2001 Loss Ratio70.2
• 2002 Loss Ratio61.2

8
ONE COMPANY EXAMPLE - ALLSTATE

• Nine Month Ending Results
• 200280.6 200361.7
• April, 2003 Statement by CEO Edward Liddy
• Planning to increase marketing and advertising in
  support of homeowners.
• PIF is up in 32 states (2nd quarter vs. 1st
  quarter.

9
CONNING PROJECTIONS

• 2003 101.9
• 2004 102.8
• 2005 102.5

10
WHY THINGS MAY NOT BE AS BRIGHT AS HOPED FOR
11
THINGS TO BE CONCERNED ABOUT

• How will regulators react to improved
  profitability of companies?
• Credit issue is still an open concern in many
  states.
• Use of some types of prior losses is being
  challenged in various markets.
• Residual markets are growing.

12
What is the major outstanding question for
homeowner insurers?

• Have companies truly addressed the underlying
  issues which led to their problems?

13
WHAT SHOULD THE INDUSTRY BE DOING?

• Increased rates and underwriting are only a short
  term answer.
• Major areas to examine-
• Technology
• Claims
• Policy Forms / Coverage
• Pricing / Underwriting

14
Technology

• Interface with the customer needs to be better.
• More data needs to be readily available.
• Companies need to be able to more quickly
  implement changes.

15
Claims

• Leakage has to be stopped.
• Overpayment of claims.
• Was repair made?
• How often is subrogation sought?
• More controls of vendor management.
• Better feedback to the customer and to
  underwriting.

16
Policy Forms / Coverage

• Should the policy revert back to true individual
  catastrophic coverage?
• What types of coverage should be added?
• Should separate policies for maintenance be sold?
• How does the industry avoid black eyes when new
  exposures arise such as mold?

17
Pricing / Underwriting

• There needs to be more segmentation.
• Credit scoring and prior losses are a start.
• More rating factors around both the customer and
  the dwelling need to be developed.
• Pricing by peril.
• Underwriting needs to be based on loss ratios,
  not frequency.