Homeowners Insurance Profitability- Is the P&C industry taking the right actions and have we learned anything? Randall E. Brubaker, FCAS Aon Re Services, Chicago

Best’s Aggregates and Averages Combined Ratios

Prospective ROE’s at Current Rates Homeowners Return On Equity Study Countrywide ROE 6.3% Based on review of rate filings of top five companies in each of 26 largest states. ROE’s assume equity capital and reinsurance consistent with A. M. Best “A” rating, and allocation of capital and reinsurance cost by state by Aon Re Services, net of FHCF, and excluding Earthquake shake loss.

Homeowners ROE Analysis Input Data Wisconsin Homeowner Rate Filings Effective as of July 2003

Homeowners ROE Analysis Indicated/Filed ROE’s Wisconsin Homeowner Rate Filings Effective as of July, 2003

Equity Capital Reinsurance Capital Retention Catastrophe Over the Top Co-participation Reinsured Layers Equity/Reinsurance Requirements Reserve Risk Premium Risk Non-Catastrophe

Rate Increases for 14% ROE Homeowners Return On Equity Study Countrywide Increase 12.9%

Recent Homeowner Rate Filings

Casualty Actuarial Society Ratemaking Principle The rate should include a charge for the risk of random variation from the expected costs. This risk charge should be reflected in the determination of the appropriate total return consistent with the cost of capital and, therefore, influences the underwriting profit provision.

Alternative Charges for Random Variation Direct Cost Methods - Before Reinsurance Capital Allocation Based on Volatility or PML Extra Underwriting Margin Based on Volatility Net Cost Methods - Based on Cost of Reinsurance Net Cost of Reinsurance (may be based on judgement and inadequate) Total Cost of Reinsurance (combined with losses net of reinsurance) Capital Allocation Based on Volatility (Net of Reinsurance)

Underwriting Profit/Reinsurance Cost Ratemaking Provisions From Aon ROE analysis - for illustration only

Florida Administrative Code Calculation of Investment Income (And Underwriting Profit Provision) (7) … (b) Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect.

Five Year Homeowners Loss Ratios

Catastrophe Loss as Percent of Property Premium US Aggregate: 17.8%