Tag Archives: homeowners

2017 Outlook for Homeowners ROE

The estimated prospective ROE for homeowners this year is 4.5%, down from 6.7% in 2016. There are three key themes to note regarding homeowners insurance in 2017:


The homeowners’ line of business continues to grow; premiums increased to $91 billion in 2016 from $89 billion in 2015. The rate of growth has slowed from prior years, and slower growth is expected in the near future with less aggressive but positive rate change in the pipeline. Further, catastrophe losses are rising faster than inflation, and coverage gaps continue in perils (like floods), suggesting opportunities exist for carriers to find premium through coverage innovations.

Divergent Markets

From the macroscopic perspective of this study, there are at least three different homeowners markets:

1. Florida, a market unto itself.

Eight of Florida’s 10 largest carriers have limited name recognition outside the Florida market, though several are expanding to other coastal states. Remove Florida and US ROE increases to 9.1%, suggesting the assumptions of this study (nationwide carrier with A.M. Best “A” rating) differ from market reality in the sunshine state.

2. The hurricane-exposed coast, excluding Florida.

Hurricane coast states posted an ROE of 6.7% in this year’s study. At present, these states are characterized by heavy regulation; strong competition between established brands vs. younger carriers; and sophisticated risk differentiation based on granular catastrophe-savvy rating plans.

3. Everybody else.

The remainder of the U.S. owns a respectable 12.2% ROE with market share largely dominated by big-name national and super-regional brands. Regulatory considerations are easier to navigate than in coastal states. Catastrophe risk has unique challenges associated with less robust models for thunderstorm, wildfire and flash flood risks as compared to hurricane risks. California and Washington are unique because of their strict regulatory environment, but they otherwise resemble the other states in the cohort in terms of perils and players of note in part because earthquake endorsements are not required for home loans, show limited take-up and are ultimately excluded from this analysis because they roll up to the earthquake annual statement line.


This year’s study examines “one dollar of homeowners premium,” which highlights 8 cents of loss adjustment and 21 cents of policy acquisition costs (12 cents for commissions and brokerage plus 9 cents for other acquisition costs). These areas of the value chain are coming under attack from insurtech startups eager to test established carriers’ ability to adapt rapidly evolving technology. Aon’s Digital Monitor currently tracks over 40 startups, backed by nearly $2 billion in venture capital, that are attacking these areas of the property and casualty value chain (not all in homeowners, specifically). Mobile and software-as-a-service platforms, drone and satellite imagery and proprietary catastrophe-detection internet-of-things-enabled hardware promise to continue to apply pressure to traditional homeowners carriers’ approach to the business of insurance.

ROE study methodology

The basis of the prospective ROE estimate is industry, state and aggregate statutory filing data including reported direct losses, expenses, payout pattern and investment yields. We replace actual historical catastrophe losses as measured by property claims services with a multi-model view of expected catastrophe loss. On-leveling of direct premiums to current rates uses rate filings of the top 20 insurance company groups by state. Finally, estimated capital requirements and reinsurance costs consider a nationwide-personal-lines-company writing both home and auto business at a capitalization level consistent with an A.M. Best “A” rating. The ROE estimates exclude earthquake shake losses; the premium and losses for that coverage are recorded on a separate statutory line of business.

See also: 10 Trends on Big Data, Advanced Analytics  

The diversification available to a nationwide personal lines insurer impacts the ROE calculation. For instance, homeowners business in California diversifies Gulf and East Coast hurricane exposure for a nationwide insurer. A California standalone would incur higher capital and reinsurance costs than the California portion of a nationwide insurer with similar premium volume in the state. Similar results are to be expected for any other regional or single state insurer.

The normalization of catastrophe by this study replaces the local impacts from large events — like Harvey, Irma or the first and second quarter hail and wind losses experienced in 2017 — with the modeled catastrophe average annual loss. The prospective impact to the line from these events remains to be seen, and future versions of this study may attempt to measure impacts to rate level and reinsurance pricing.

The 2017 nationwide ROE estimate of 4.5% falls below our 2016 estimate of 6.7%. Profitability challenges to the line include: (1) a slowdown of rate increases (and decreases by some major carriers) that failed to pace loss and expense inflation, and (2) premium and exposure growth that pushed up the A.M. Best capital requirements to maintain the assumed “A” rating. Declining costs of reinsurance to capitalize the volatility inherent in the homeowners line were insufficient to offset the increased capital charges. Softening reinsurance costs cumulatively added over 210 bps of ROE in our study since 2013; after the catastrophe losses of 2017, the reinsurance and capital markets will be closely watched for pricing signals.

The maps above and below show, in loss ratio points, the amount that catastrophe experience exceeds model average annual loss. Adjusting combined ratios for expected versus historical catastrophe loss is an important step to distinguish weather-related randomness from inadequately priced business. Historical catastrophes can distort measures of results at a state level, causing the noise to overwhelm the signal. While state level adjustments can be significant, the 10-year nationwide experience catastrophe loss ratio of 13 points is meaningfully lower than the modeled expected catastrophe loss ratio of 23%. 2016 ended the dearth of hurricane activity that was the boon of gulf coast carriers for nearly 10 years. The Gulf states plus Florida had 30 points of favorable results relative to expected from 2007 through 2016, and, as of the time of this publication (even with Harvey and Irma), that favorable experience is more than 24 points of performance lift.

The five year retrospective comparing catastrophe experience to modeled expectation is favorable for much of the country. States on the eastern slopes of the Rockies into the plains (including Colorado, Nebraska and Montana) experienced pain primarily from hail-driven losses in several of the last five years. Texas is an interesting case study because the lull in hurricane activity drives overall favorable experience overwhelming thunderstorm losses that contributed to a five-point drag on the loss ratio. The five-year averages reflect the period from 2012 to 2016. Across the country, the first two quarters of 2017 experienced the highest thunderstorm-loss levels since 2011, and the third quarter included multiple major landfalling hurricanes. Taken together, this should partially erode the favorable experience of the previous five years.

The percentages in the map above show the direct target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and non-catastrophe risk. The targets are for a sample of nationwide companies only and will vary among individual companies because of state distribution of premiums, capital adequacy standards, target return on capital, allocation methodologies, reinsurance and other considerations. For a diversified insurer with a footprint similar to the industry, the target combined ratios fall into three main categories: (1) Florida, (2) other hurricane exposed states and (3) states not materially exposed to hurricanes.

The map above shows average approved rate changes filed between January 2016 and August 2017 for the top 20 homeowners groups by state that made a filing in the period. Rate activity, while still positive, continues the slowdown observed in last year’s study. Notable decreases came from at least one large industry carrier, suggesting potential divergence in pricing levels that the averages fail to reflect. Rate changes on the coast, including Florida and Texas, ticked up significantly versus observations from last year. For Florida, in particular, rate activity was likely insufficient to on-level for assignment of benefits and claims adjustment issues facing the state’s carriers.

See also: How to Drive More Quotes  

Homeowners as a growth engine continues to be the headline for the insurance industry through 2016; the line has outpaced GDP and most other underwriting segments since 2010. Direct written premiums increased from $71 billion in 2010 to $91 billion in 2016, with a projected $93 billion for 2017 given prospective rate activity.

A strong component of growth through 2015 was the emphasis on rate adequacy with indicated rate levels increasing over 30% since 2010. Policyholders changing carriers will prevent the industry from realizing the full aggregate benefit of the individual carriers’ rate actions.

The “S” shape of the rate change curve suggests the line should be watched carefully. The rate activity through 2015 is now fully earned, and rates since 2015 show more modest increases. Time will tell if rate increases around 2% will be sufficient to track loss and expense inflationary pressures.

Our study suggests that, at prospective 2018 rates and before income taxes, insurers keep slightly more than four cents of profit for every premium dollar they earn. The four cents of direct profit is shared between the primary carrier, reinsurance partners and the U.S. Treasury.

The full report is available here.

Lemonade Reports: ‘Our First 100 Days’

Here is an underwriter’s report on our first 100 days. If you’re interested in how Lemonade is functioning from an insurance perspective, read on. I hope it will be less painful, and more revealing, than rummaging through regulatory filings.

A Word to the Wise

We launched three months ago, and, as anyone with a feel for statistics will tell you, 100 days of data isn’t that meaningful in insurance. So I don’t want to create the impression that the results I’m sharing establish a predictable trend. They don’t. We’re here for the long term, and long-term results are what matter. Our story will evolve – transparently – over time.

Lemonade’s growth got off to a strong start.

Premium growth is important (see analysis in Part 2 of our Transparency Chronicles), though in this update I’m going to focus more on insurance metrics, with commentary on the quality and diversity of our customers and claims. On those fronts too, I’m happy to report: so far, so great.

Our Customers, Through an Insurance Lens

1. Our customers are new to insurance

More and more people are switching to Lemonade every day, coming from very well-known insurance companies. At the very least, this is a good early sign. But, more importantly, we’re bringing in a new breed of customers – the underserved. The majority of customers insured with Lemonade are actually new to insurance. They had never found an insurance company that they liked, trusted or interacted with, the way they wanted – until now. We love that. Insurance is something everybody needs, and we are not competing just on price, but on simplicity, speed, value and values.

2. Our customers are thoughtful

Although the basic $5/month policies are sufficient for some, a lot of our customers are asking us not only to protect them, their homes and their basic stuff but to add valuables to their policies and cover their jewelry, artwork, musical instruments, bikes or laptops.

It’s thrilling when customers buy the basic, and then add all of things they value. Some of the requests have been quite surprising! While we can’t add everything immediately, we’re accommodating as fast as we can.

See also: More Transparency Needed on Premiums  

3. Our customers are diverse

In insurance, you never want just one type of customer. Because our goal is to share risk across customers, too much concentration isn’t ideal. While we have a lot of renters, almost 50% of our premium came from homeowners – many with more than $500,000 and as much as $1.5 million of coverage.

Our customers are geographically diverse, as well. While 35% of our premium is from Manhattan, the rest is spread across the New York metropolitan area, and across the state. Lemonade is no one-trick pony.

4. Our customers represent “high quality” risks

Perhaps the most important part of underwriting is ensuring we don’t have adverse selection. This means insuring someone only because our prices are (too) low, or because we attract the riskiest policies. We use a series of factors to help predict if a risk is better or worse than average, and to price it as accurately as possible.

Two bits of good news in this regard:

  • Potential customers who come to Lemonade for insurance score above average as risks.
  • Even more important, the best risks tend to end up buying Lemonade!

Having said that, there’s a lot we can improve on the underwriting side, and we’re working hard to train our algorithms to make better decisions. The more data we gather, the better our algorithms get.

5. Our customers are helping us to make insurance into a social good

We celebrate claims when they come in. We’ve had a few (six in 2016, to be precise) – exactly the number we expected based on industry statistics. What is different is that our claims have all been small – way smaller than industry averages. It’s too early to mean much, but right now our loss ratio is much better than the rest of the industry, and I’m hoping this hints that the Lemonade Giveback will be strong this year.

The Nitty Gritty Insurance Numbers

Right now, more than 25% of people who get a price, buy. This is high by any standard, both in insurance and tech. What is extraordinary, however, is the trend. The percentage of people buying when they get a quote is increasing every single month. In December, we were up to 36% for renters, and 26% overall. In insurance, you want to buy from someone you trust. We’re ecstatic that our customers trust us to protect them, and we look forward to living up to that promise.

Our written premium (basically how much insurance we sold) in 2016 (the last 100 days of the year, really) was $179,855. Our gross loss ratio (or claims we received in 2016 divided by earned premium) was 20%; a portion of that should be recovered from another insurance company, so we expect our final loss ratio for 2016 to end up at about 12%. While our reinsurers are standing by to help pay losses, we have not needed them yet.

See also: Is Transparency the Answer in Healthcare?  

What We Need to Work On

While it all sounds great, some things did not work as we expected, and we had to adjust accordingly:

1. Get More Data

There is a ton of information out there that can help sign customers up faster and ensure the coverage is right. While we gather and implement a lot of data, we’re only scratching the surface. For some homes, we need to ask you the square footage, which is kind of lame in this day and age. We’ve made it a priority to seek and incorporate new and different data every day to make sure policies are appropriate, and our customers are protected.

2. Innovating in… Language!

When we started selling policies back in September, we wanted to make sure regulators and customers were comfortable, so we launched Lemonade with the industry-standard insurance policy contract. We know that it is poorly written, and unless you have a law degree – frankly, even if you have a law degree – it can become confusing.

Who knew your liability coverage actually changes depending on whether you are also an insured under a policy written by the Nuclear Insurance Association of Canada (Section II.F.5.a.(3)). I assume most of our policyholders do not. We’re going to improve the policy so you can actually read it and understand what is covered and what is not. It will take time, but we will do it – I promise.

3. Improving Our Coverages

Our policy is great for most people, but isn’t as customizable as we want it to be. For example, at launch we could not add fine art – now we can. Need your landlord listed on the policy? We added that a few weeks ago. Identity theft coverage? Still no, but that will be here in a week or two. Kidnap and ransom coverage – that one is a little further off. Kudos to our customers, whose patience is crucial as we continue to build a policy that covers everything you want to protect. If we can’t protect it yet, we will tell you… and know we are adding options every day.

A lot of the incentive behind the Lemonade Transparency Chronicles was about trust. As Daniel wrote in his post, trust can’t be demanded, it has to be earned. We have the good fortune of having a strong, rapidly growing base of customers who trust us, and whom we trust too. Together, we are building a company for the long haul, and the early metrics make me feel like we are on the right path.

Stay tuned for Professor Dan Ariely’s report next week, revealing Lemonade’s social impact in its first 100 days of business.

This post originally appeared on the Lemonade blog.

5 Misunderstandings on Home Insurance

Hiring an insurance broker should mean ease, speed and extra security. But not everything about putting a middle man in the process of buying insurance is great. Mistakes and mishaps are bound to happen at some point.

Misunderstandings between homeowners and insurance brokers aren’t uncommon. The insurance industry has become a lot more chaotic. More clients are finding it hard to trust agents and brokers, who do sometimes use unethical tactics to earn a living.

Let’s take a look at some of the most common misunderstandings.

1. Conflict of interest

Insurance brokers get remunerated through a fee or commission for their services. They can get paid by the insurer for bringing a large volume of business to the company. They can also get a commission from their clients by finding the best deal and insurance for them.

The risk of conflict arises when the insurance broker favors his personal gains over his duty to his client. This can result in the client agreeing to higher prices or extra coverage he doesn’t really need.

See also: A Wakeup Call for Benefits Brokers  

2. Nondisclosure and negligence

Before a client signs up for insurance, it is his responsibility to divulge all pertinent information, including his income, medical history, home values and details of his home security. Failure to disclose all this information can render him uninsured when he files a claim.

There are cases, however, where even forthright and honest men can forget pieces of information. Having an insurance broker handling all the processing can make it more likely to happen. And negligence by a broker can result in a costly misunderstanding.

3. Failure to understand exclusion

Clients mostly shop around for price and reputation without realizing the other important factors that can affect their coverage.

Insurers are slowly cutting back on coverage and increasing their deductibles in an attempt to increase profits. While insurance brokers can give their best when discussing the exclusion clauses buried in lengthy policies, they can still miss critical details, and one word or phrase can mean thousands of dollars when it’s time to make a claim.

A carport, for example, does not technically fall into the category of a building, which means that a client should not expect his insurance to cover a collapse.

4. Underinsurance

When doing an assessment, a typical insurance broker would need the help of real estate appraisers or an online program to know how much coverage a homeowner can get. If the broker is fairly new and untrained, he may even obtain figures by directly asking the homeowner how much exactly he is expecting to get.

This lack of knowledge can mean that homeowners are greatly underinsured. Yet they will have a false sense of assurance and only realize their problem in the wake of a disaster, such as a tornado or flash flood.

Another common misunderstanding between homeowners and insurance brokers involves replacement cost and market value. Most homeowners expect to receive a coverage that will equate to their home’s market value. Replacement cost, on the other hand, is generally higher than the amount a buyer is willing to pay for a house. It’s based on a lot of factors, including the materials used, cost of labor for the demolition and repair, etc. An agent or a broker needs to be very thorough in discussing these details so that he and his client can determine the right insurance and coverage.

See also: A ‘Perfect Storm’ of Opportunity (Part 3)  

5. Change of policies

It’s the insurer’s obligation to notify its clients about any changes in their insurance coverage. It’s also a part of the broker’s responsibilities to let his client know the terms of renewal, cancellation and expiration of the insurance he’s offering and to make sure the client understands.

But sometimes clients don’t get the message and are underinsured or even uninsured when they file a claim. In cases like this, a client can take legal action against the broker. He may also file a case against the insurer, if it changes the insurance without its client’s consent.

Communicate, Communicate

In an increasingly digital world, the modern day update to the old real estate refrain of “location, location, location” may be “communication, communication, communication.”

It may also be true that companies are only as good in the customers’ mind as the quality of their last transaction. That is particularly true when there are infrequent transaction, thus limited opportunities to make up for mistakes. In financial services, banks may have daily transactions with their customers, but insurance companies have far fewer transactions, many of which are associated with unfortunate events. Finding a way to make the most of these interactions can be important in retaining customers for the long term, in a world of low switching costs and lots of transparency.

I was reminded of this when I got an email alert from my personal lines property and casualty carrier. Like much of the East Coast, we found ourselves dealing with a winter wonderland over the weekend, which included icy roads, snowy hillsides and falling trees. Many people lost power.

In any event, the email alert reminded me that our carrier was aware of the potential implications coming from the storm and was ready to help. The message included various forms of contact info and was an opportunity to remind me of the benefits I can gain from the relationship. As my thumb moved to delete the message, I was reminded of the value of the coverage, and I realized this was one of the few messages I’ve gotten that didn’t convey a billing increase or some other “bad” information.

I had been thinking that the renewal would be coming in four months and that I probably needed to begin shopping for coverage to see what the market looks like, in anticipation of another premium increase. Getting the email reminded me that insurance is not just about rate but also about what happens when the world goes sideways.

This realization leads back to a challenge – which is to say an opportunity – for carriers to start thinking differently about the form and frequency of interaction with customers. Different demographic cohorts may have preferences for different communication channels, but one likely universal truth is that individuals want to know that they have the opportunity to do the same thing that other “smart people” like them are doing.

Amazon, of course, does a remarkable job with this. The retail brokerage investment company I deal with is nearly as good, and, as a consequence, there is little chance I will ever look to move assets. Conversely, the life insurance company I have had a relationship with for three decades only has a dialogue with me when sending documents required by regulation. In fact, when I have chosen to initiate dialogue with the carrier, it has proven to be both painful and incredibly time-intensive to get things done.

The recent example with my homeowners insurance was a pleasant surprise. It might even cause me to slow the shopping process or be more accommodating of the rate increase, which is no doubt coming.

All of this has potentially significant implications for the marketing and technology organizations for insurance carriers. Increasingly, the competition is not against other, similar companies. The issue really becomes how well carriers operate against a customer service standard that is being framed by retailers and financial institutions that are more transactionally intensive. As the lines between traditional industries and products families become blurred through the use of better technology, carriers will need to up their games considerably to maintain relevance.  Checking in on customers after an unfortunate event is a step in the right direction.