AM Best has revised its outlook on the US homeowners insurance segment to negative from stable due to high levels of natural catastrophes combined with challenges such as inflationary pressures and elevated reinsurance costs. 

Insurers have experienced three consecutive years of net underwriting losses in the segment and the pattern has continued in the first half of this year, the AM Best report says. 

Carriers are being challenged by more-frequent secondary perils, while higher retentions and co-participation due to reinsurance pricing trends means catastrophes are having a larger negative impact on results. Rising loss costs, inflation and supply chain disruptions are pressuring earnings, making it difficult to maintain rate adequacy. 

Some market leaders have curtailed new business in catastrophe-exposed areas such as California and Florida, the report says. 

“Going forward, homeowners’ carriers will find it difficult to absorb these underwriting pressures while strengthening their balance sheets. A return to underwriting profitability over the near term appears highly unlikely,” AM Best Senior Financial Analyst Maurice Thomas said. 

AM Best views overall risk-adjusted capitalisation as solid for most homeowners insurers, but the capital cushion of some companies, especially those in catastrophe-exposed areas, has started to erode due to the underwriting losses in recent years. 

The report says reinsurers have generally started to align their risk profile with a greater focus on generating underwriting profits “which have been elusive for a number of years”, and higher rates will likely persist over the near-term. 

Carriers in the homeowners segment need to maintain their focus on rate adequacy, technology adoption and catastrophe risk management for earnings stability, the report says.