Homeowners Insurance Line Three Times More Volatile Than Private Passenger Auto: Aon Re Study

The Homeowners insurance line was the most volatile major insurance line in the 14-year period 1992-2005, due in large part to the active 2004 and 2005 Atlantic hurricane seasons. Homeowners was three times more volatile than the Private Passenger Auto line, according to an Aon Re Global study.

The study shows that the Private Passenger Auto line experienced the lowest volatility during that period, followed by the Auto Physical Damage, Commercial Auto and Workers Compensation lines. Excluding catastrophe losses, the Homeowners line has a risk level comparable to the Commercial Auto line. Liability lines and Medical Malpractice also have significantly above average volatility.

Aon Re's Insurance Risk Study quantifies the systemic risk for each line of business, representing the risk to a large portfolio from non-diversifiable risk sources such as:

changes to market rate adequacy and underwriting terms and conditions;
misestimating plan loss ratios;
frequency and severity trends;
weather-related losses;
legal reforms and court decisions;
level of economic activity and macroeconomic factors.

For large books of non-cat-exposed business, systemic risk is the major component of underwriting volatility.

The report examined volatility in nearly two dozen lines including Commercial Multi Peril, Other Liability (Occurrence and Claims Made), Fidelity and Surety, and Medical Malpractice.

"The study provides objective, data-driven underwriting volatility benchmarks by line of business to help insurers provide detailed assessments of their risk profile and quantification of the adequacy of their economic capital," said Stephen Mildenhall, Aon Re Services executive vice president and chief actuary. "Insurers can use the factors as a basis for their internal capital modeling to ensure that simulation modeling tools produce credible results. The factors also will help insurers address recent rating agency requirements for robust underwriting risk modeling."

The Insurance Risk Study applies sophisticated techniques from risk theory to a database of NAIC Annual Statement data from accounting years 2001-2005 for 1875 individual U.S. groups and companies. The database, covering all 21 Schedule P lines of business, contains more than 800,000 observations. Aon Re introduced the Insurance Risk Study in 2003 to help parameterize its Prime/Re insurance simulation software, and has updated it each year since. The next update, including data from 2006 annual statements, will be made available in August 2007.

Source: Aon Re

Posted: Wednesday, March 21, 2007 12:00:00 AM. Modified: Wednesday, March 21, 2007 4:13:00 PM.

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We are 1,400 property/casualty insurance companies serving more than 135 million auto, home and business policyholders, with more than $196 billion in premiums accounting for 50 percent of the automobile/homeowners market and 31 percent of the business insurance market. We are the largest and most diverse property/casualty trade association in the country, with regional and local mutual insurance companies on main streets across America joining many of the country’s largest national insurers who also call NAMIC their home. More than 200,000 people are employed by NAMIC members.