OII Backgrounder: Homeowners insurance outlook
(9/04)

Less than profitable insurance line for past decade

Insurers across the country and in Ohio have been providing homeowners coverage at a loss for several years. An industry combined ratio of over 100 means that more was paid out in claims and expenses than was collected; a ratio below 100 means that more was collected than paid out. (The combined ratio is the percentage of each premium dollar a property/casualty insurer spends on claims and expenses such as business overhead. A combined ratio above 100% means the insurer is losing money on that line of business. A combined ratio of 105%, for example, means that $1.05 was paid in claims and expenses for every dollar of premium earned.).

Losses in the homeowners insurance line between 2000–2003 are estimated at $17 billion, according to figures released by the Insurance Information Institute (III). This rivals the $20.3 billion in insured property losses from the 9/11 Terrorist Attack. In 2001, US homeowners insurers paid out $7.3 billion more than they collected in premiums, making it the second worst year on record. In 2002, insurers paid out $3.5 billion more in losses and expenses than received in premiums. 1992 was the worst year on record, with $11.5 billion more paid in losses than in premiums collected.

Ohio insurers did not profit from this line between 1993–2002, according the National Association of Insurance Commissioners (NAIC) “Profitability by Line by State” report published in December 2003. 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 1 below for Ohio and US Profitability for Homeowners Insurance, 1993-2002.

TABLE 1: 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

US and Ohio 2004 premium forecast

According to a June 2004 report from the Insurance Information Institute (III), the cost of insuring a home in 2004 is expected to rise by about 2.8%, the smallest increase in five years. The projected increase represents a substantial slowdown from 2003 when homeowners insurance costs rose by an estimated 7.4%.

NOTE: The III 2004 homeowners report is online at: www.iii.org/media/updates/press.736740/

As of May 20, 2004 the Ohio Department of Insurance reports a 2.9% increase filed by Ohio’s top 10 homeowners insurance writers, representing about 70% of the homeowners insurance market. This is substantially lower than the 10.3% increase reported by these companies for 2003. The Ohio Insurance Institute estimates Ohio’s 2004 average homeowners premium to be about $480, a $14 increase from 2003.

Ohio and US homeowners premiums: 1995–2004

Despite the fact that Ohio insurers have been losing money on the homeowners line for years, NAIC’s homeowners premium studies (“Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance” studies) show that Ohioans pay significantly lower homeowners insurance premiums than the US average. The NAIC study looks at homeowners premium data for all 50 states and the District of Columbia. See Table 2 for average homeowners insurance premiums for 1995–2001 and Ohio and US projections through 2004.

TABLE 2:  Average homeowners insurance premiums in Ohio and US 1995–2001
and projections 2002–2004

Sources: 1995–2001 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.
Note: Average Premium = Premiums/Exposure per House-Years. A House-Year is equal to 365 days of insured coverage for a single dwelling.

2002–2004 estimates: Insurance Information Institute estimates based on data from the National Association Insurance Commissioners (Revised 9/04 based on NAIC actuals for 2001.)

2002–2004 Ohio estimates: Ohio Insurance Institute estimates based on data from the Ohio Department of Insurance (Revised 9/04 based on NAIC actuals for 2001.)

Ohio’s homeowners insurance premium increase averaged 17.8% in 2002, based on Ohio Department of Insurance data for the top 10 homeowners insurance writers. This translates to about $64. The 2003 premium increase translates to about $43. Ohio consumers can expect about a $14 increase in 2004 based rate filings with the Ohio Department of Insurance as of May 20, 2004.

Factors affecting homeowners insurance premiums

• Higher than normal catastrophe frequency and severity: 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.

  Ohio catastrophes in recent years include:

  – 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.

• 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 22.9% between 1998–2002.

  According to a February 2003 report by Harvard's Joint Center for Housing Studies (JCHS), about 41 million homeowners added to or improved their homes between 2001–02. Remodeling expenditure totals, which includes home and rental property maintenance and repair, and home and rental property improvements were estimated at $214 billion in 2001. An estimated $125 billion was spent on home improvements between second quarter 2003 and first quarter 2004, according to an April 2004 JCHS release.

• 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 emergence of mold claims that were virtually unheard of just a few years ago cost insurers $2.3 billion in Texas alone in 2002, according to Texas Department of Insurance figures. This is twice as much as the year before.

• 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 slowed for 2002, (1.85 per 100 policies), the average amount paid for such claims rose 20% between 1998–2002 to $3,098 in 2002.

  Wind/hail and water damage/freezing claims accounted for about 42.6% of US homeowners and 50.4% of Ohio’s homeowners claims in 2002, reports ISO.

Ohio’s competitive homeowners market

According to A.M. Best data for 2002, only three states, Florida, Pennsylvania and Illinois, have more homeowners insurance providers than Ohio. In 2002, there were 289 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: www.ohioinsurance.org/factbook2002/chapter4/chapter4_f.shtml
• 2000 Average homeowners and renters insurance premiums by state (pdf file)
• 2001 Average homeowners and renters insurance premiums by state (pdf flie)