Profitability is improving in the US homeowners cover market after rising inflation affected loss costs, but natural disaster risks remain high, Aon says. 

The broker’s homeowners return on equity (ROE) report says the insurance industry and state regulators have navigated one of the most challenging inflationary periods in recent history by trying to improve rate adequacy.

Insurers have also sought ways to reduce claims frequency where possible. 

“However, it is imperative to note that while non-cat loss cost inflation has improved, catastrophe losses have remained elevated and continue to pose a challenge to the industry,” Aon says.

The report considers ROE prospects for insurers that have scale and nationwide diversification, and for monoline specialists operating in a single state.

Aon’s estimated headline prospective ROE for the national cohort is 7%, compared with 5% last year. Negative ROE is expected to persist for more than one-third of the specialists, but the number of states with levels above 4% has increased to 14 this year from five.

“With inflation and rate increases returning to normal levels, many companies are looking to grow by increasing market share, expanding into new markets or adding new products.”

The report warns insurers should be judicious in their growth strategies and remain vigilant on catastrophes, as the secondary perils of severe convective storm, wildfire and “possibly flood” present challenges and opportunities.