OII backgrounder: Homeowners insurance outlook
(3/05)

US and Ohio premium forecast

According to a March 2005 report from the Insurance Information Institute (III), the cost of insuring a home in 2005 is expected to rise by about 2.5%, the smallest increase in six years. The projected increase represents an ongoing slowdown in premium adjustments. The US average homeowners insurance increase in 2004 was 2.8% and 7.4% in 2003. III estimates the 2005 average US cost of homeowners insurance will be $677, up $17 from $660 in 2004.
NOTE: III’s 2005 homeowners report is available online at: www.iii.org/media/industry/additional/2005homeoutlook/

The Ohio Department of Insurance (ODI) reports a 1.9% increase filed by Ohio’s top 10 homeowners insurance writers in 2004. The top 10 writers represent about 70% of Ohio’s homeowners insurance market. This is substantially lower than the 10.3% in 2003 and 18.1% increase reported by the top 10 writers in 2002. The Ohio Insurance Institute estimates Ohio’s 2005 average homeowners premium to be about $472 based on the 2.5% national average increase projected by the Insurance Information Institute. This translates to an $11 increase to Ohio homeowners.

Ohio and US homeowners premiums: 1995–2005

According to NAIC’s homeowners premium studies (“Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance” studies) Ohioans have paid notably lower homeowners insurance premiums than the US average for several years. This is despite the fact that Ohio insurers paid out more in homeowners insurance losses than in premiums collected since 1993. (See section “Factors affecting homeowners insurance premiums–Losses paid higher than premiums collected”)

See Table 1 for average homeowners insurance premiums for 1995–2002 and Ohio and US projections through 2005. The NAIC study looks at homeowners premium data for all 50 states and the District of Columbia.

TABLE 1: Average homeowners insurance premiums in Ohio and US 1995–2002 and projections 2003–2005

Sources: 1995–2002 US and Ohio data: Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance, published by the National Association of Insurance Commissioners 1996-2004; Table 4 in all reports. Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1-4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings, broad named-peril coverage on personal property, and is the most common package written. The most recent NAIC study to-date is for 2002, released in late 2004.
Note: Average Premium = Premiums/Exposure per House-Years. A House-Year is equal to 365 days of insured coverage for a single dwelling.

2003–2005 US estimates: Insurance Information Institute estimates based on data from the National Association Insurance Commissioners.

2003–2004 Ohio estimates: Ohio Insurance Institute estimates based on data from the Ohio Department of Insurance.

Factors affecting homeowners insurance premiums

• Losses paid higher than premiums collected: Losses are the most important driver of homeowners insurance premiums. According to the Insurance Information Institute, between 1990–2002, home insurers paid out, on average, $1.17 in losses and expenses for every $1 they earned in premiums.

Between 2000–2002 alone, homeowners insurers paid out an estimated $13.5 billion more in claims than they collected in premiums, rivaling the $15.5 billion in insured losses from Hurricane Andrew—still the single most expensive natural disaster in history in terms of insured losses. But by 2003 results had improved substantially, with insurers paying out an estimated $0.98 for every dollar earned.

According the National Association of Insurance Commissioners (NAIC) “Profitability by Line by State” report (December 2003), Ohio insurers paid more in homeowners insurance losses than collected in premiums between 1993–2002. The NAIC study finds that the Ohio homeowners insurance market has operated at a greater loss ratio than the US average since 1996. For example, for every dollar collected in homeowners insurance premiums in 2002, Ohio insurers paid out nearly $1.19; while the national average was $1.06 for every $1.00 collected in premiums. See Table 2 below for Ohio and US Profitability for Homeowners Insurance, 1993-2002.

TABLE 2: Ohio and US profitability for homeowners insurance, 1993-2002

* For every dollar collected in homeowners premiums, the amount shown was paid out that year
Sources: National Association of Insurance Commissioners “Profitability by Line by State in 2002,” December 2003 and “Profitability by Line by State in 2001,” December 2002

• Higher than normal catastrophe frequency and severity: In 2004, Hurricanes Charley, Frances, Ivan and Jeanne dealt insurers a $21.6 billion blow and contributed to a record $27.3 billion in catastrophe losses for the entire year.

In 2003, insured natural disaster losses totaled nearly $13 billion, making it the third highest year on record. The year saw three, billion dollar-plus disasters, including the California wildfires ($2.0 billion) and Hurricane Isabel ($1.7 billion).

Between 1993-2003 insurers paid out more than $106 billion in catastrophe-related losses—about $700 million per month, excluding the impact of the September 11, 2001 terrorist attack. In 2003 catastrophe losses from 21 natural disasters reached nearly $12.9 billion, according to Property Claim Services (PCS), up 120% from 2002 year-end totals. PCS reports Ohio catastrophe claims for 2003 at $320 million, up from $257 million in 2002.

Although it’s difficult to project exactly how catastrophe losses affect premiums from one year to the next, part of future premiums are based on an insurer’s past loss exposure from storms and other types of homeowners losses over a period of time. It’s important to note that each company’s loss exposure varies by the type and location of the storm, and the number of policyholders affected. The more catastrophe-prone states are likely to have the biggest affordability issues.

Ohio catastrophes in recent years include:

– The January 4-6, 2005 snow and ice storm that caused major power outages and significant flooding across the Buckeye state caused at least $38 million in insured losses; 14,800 claims were filed.
(www.ohioinsurance.org/newsroom/newsroom_full.asp?id=252)
– Preliminary estimates from the December 2004 holiday snow and ice storm that caused major power outages and treacherous travel across the state caused at least $85 million in insured losses from 27,119 claims.
(www.ohioinsurance.org/newsroom/newsroom_full.asp?id=251)
– A series of May 2004 storms affected parts of the Buckeye state and produced at least $167 million in insured losses. The most prominent storms hit the Canton area (May 17), Newark and northeast Ohio (May 21), and the greater Dayton area (May 26-27).
(www.ohioinsurance.org/newsroom/newsroom_full.asp?id=204)
– Easter Sunday Central Ohio hailstorm (April 20, 2003) resulted in at least $241 million in insured losses from 38,219 claims (updated May 2004).
– February 2003 snow and ice storms across Ohio caused at least $17.5 million in losses. (www.ohioinsurance.org/newsroom/news03-11-03.asp)
– The November 10, 2002 series of tornadoes and storms across the Buckeye stat caused at least $91.6 million in insured losses. The storm front set off multiple tornadoes, including an F-4 tornado packing winds over 200 mph in Van Wert and hail, rain and damaging winds in other parts of the state.
(www.ohioinsurance.org/newsroom/news11-18-02.asp)
– At least $40 million in claims associated w/tornado and severe weather moving through the state on April 28, 2002.
(www.ohioinsurance.org/newsroom/news05-14-02.asp)
– A hailstorm in the Dayton-Kettering area on April 9, 2001 caused at least $70 million in insured losses.
(www.ohioinsurance.org/newsroom/news06-13-01.asp)
– Insured losses from the September 20, 2000 Xenia tornado were about $45 million, according to Property Claim Services
– January 1999 winters storms: Snow, ice, freezing rain and high winds combined forces throughout the Buckeye State in a series of January 1999 winter storms that caused over $41 million in insured losses from at least 26,000 claims.
– An F-4 tornado that ripped through the Cincinnati area on April 9, 1999 caused at least $66 million in insured losses.
(www.ohioinsurance.org/newsroom/news4-16a-99.asp)
– Blizzard of '96: This dual winter storm system first hit the second week of January 1996, followed by more snow, ice and strong winds during the third week of January. OII estimates that insured losses from these two storms topped $46.2 million in the Buckeye State, with at least 28,500 claims being filed.

• Cost of construction: On average, home construction costs in Ohio rose 10.4% between 1998–2003. A residential home built in Ohio in 1998 for $100,000 cost $110,400 to build in 2003 (www.ohioinsurance.org/factbook/2003-04/chapter4/chapter4_g.shtml).

• Growth in home repair and improvements and related costs: According to the US Department of Labor, Bureau of Labor Statistics, the cost of household item repair rose nearly 23% between 2000–2004.

The Harvard Joint Center for Housing Studies (JCHS) reports that home improvement spending remains on the upswing. According to the Remodeling Activity Indicator (RAI) devised by JCHS, homeowners continue to invest in their homes and spent nearly $127 billion on remodeling during 2004, a 6% increase over 2003 levels.

• Home values are on the rise: The National Association of Homebuilders estimates the average price of a US existing home in 2004 to be $224,000, up 27% since 2000. The average price of an existing home in 2000 was $176,200. The median sales price of new single-family homes increased 12.2% to $218,000 for 2004, up from $195,000 in 2003.

• Increase water-related claims costs: Companies continually look for ways to protect property against the rising costs associated with tornadoes, hurricanes, heavy rains and hailstorms without sacrificing coverage. Some companies are investigating higher deductibles for such claims, while others consider limiting the amount on such claims, assessing losses at actual cash value rather than replacement cost and other such adjustments.

According to Insurance Services Office, Inc. (ISO), while water damage and freezing claims frequency rose slightly between 2002-2003, (2.06 claims per 100 in 2003; 1.9 per 100 policies in 2001), the average amount paid for such claims rose 20% between 1999–2003 to $4,024 in 2003.

ISO reports wind/hail and water damage/freezing claims accounted for over 47% of US homeowners losses in 2003, up from of 42.6% in 2002. About 59% of Ohio’s homeowners losses in 2003 were either wind/hail or water-related, up from 50.4% in 2003. ISO collects data from about 40% of Ohio’s homeowners insurance market.

Ohio’s competitive homeowners market

According to A.M. Best data for 2003, only two states Pennsylvania and Illinois, have more homeowners insurance providers than Ohio. In 2003, there were 296 companies licensed to write homeowners insurance in the Buckeye state. Ohio’s total homeowners premium volume ranks eighth in the nation. Competition among insurers provides an affordable homeowners insurance market for consumers.

Also see:
Homeowners savings tips:
http://www.ohioinsurance.org/factbook/2003-04/chapter4/chapter4_f.shtml