With low investment gains, insurers have to achieve higher levels of underwriting profit for homeowners than they do for longer-tailed liability lines to hit a target rate of return on surplus. Homeowners expense ratios are high compared with personal auto and nonproperty commercial lines, partly because the average premium for homeowners policies is lower than for most other lines. Because many of the processing costs are the same regardless of the amount of premium, homeowners policies generate higher costs per dollar of premium. Results by Market Segment Expense ratios vary by company. The direct writers' average expense ratio increased 2 percentage points from 1987 to 1995, while the ratio for agency writers declined by almost 1 percentage point.
Results vary substantially by individual company and by type of company.
Large insurers, generally direct writers, have experienced more favorable homeowners results than small and medium-sized insurers, primarily as a result of lower expenses. All three are direct writers, and all have lower expense ratios than most other companies. But they also suffered extremely high losses during recent catastrophe years. One reason for the three largest insurers' adverse results in 1992 was the group's high market share in catastrophe-prone states. The second reason was that these insurers tended to purchase little or no reinsurance, relying instead on their large, geographically diversified portfolios to manage catastrophe risk.