CHICAGO, Oct. 20 /PRNewswire-FirstCall/ -- Strong competition and efforts by state regulators to hold down homeowners insurance rates have driven a slight decline in the prospective return on equity in the homeowners line of insurance for 2008, with this year's prospective ROE at 6.5 percent versus 7 percent in 2007, according to an annual analysis by Aon Re Global.

Also weighing down the countrywide return on equity -- by 0.3 percent -- is the expected assessment of residual market facilities, insurance vehicles which provide coverage to homeowners unable to obtain coverage in the private insurance marketplace. Residual market facilities have grown substantially in market share since the start of the decade.

Prospective ROE in "hurricane-exposed states" is 6.0 percent, and in "non-hurricane states" prospective ROE is 7.1 percent, according to Aon Re Global's analysis. To improve returns on equity to 14 percent, rates in hurricane-exposed states need to rise an estimated 35.3 percent, while rates in non-hurricane states need to be increased by 12.9 percent.

Hurricane-exposed states are those that extend from Texas to Maine.

"Insurance companies in the hurricane states need more capital to protect against catastrophic loss, and this means that larger rate increases are needed to improve the return on capital to an attractive level," said Randall E. Brubaker, FCAS, senior vice president with Aon Re Services.

A well-designed reinsurance program may reduce an insurance company's rate-level needs. A study released by Aon Re Global in September 2008 found reinsurance continues to be one of the most accretive forms of capital available in the industry. Equity risk premiums and credit risk spreads are significantly more expensive, and the incremental benefit of reinsurance as a form of underwriting capital has become even more pronounced.

"Reinsurers have a varying appetite for additional risk based on whether an insurance company's underwriting portfolio offers the reinsurer diversification, or further concentration of risk," said Kenneth Selzer, executive vice president with Aon Re Global. "We take this into consideration in advising our clients on the optimal mix of equity and reinsurance capital, and also in the placement of their programs in the reinsurance marketplace."

To request more information about the 2008 Homeowners Return on Equity Outlook, visit http://aon.mediaroom.com/index.php?s=63&item=274.

About the 2008 Homeowners Return on Equity Outlook

The study looks by state at the prospective return on equity of the homeowners line. The analysis considers each state's unique level of catastrophe risk; higher capital requirements and higher costs of reinsurance are allocated to the states that have greater catastrophe risk. Analysis for individual clients will vary. This is the eighth year that Aon Re Global has undertaken this study, and the first year that the analysis includes the expected costs of assessments in appraising expected profitability of the homeowners line.

About Aon

Aon Corporation (NYSE: AOC - News) is the leading global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting. Through its 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Our industry-leading global resources, technical expertise and industry knowledge are delivered locally through more than 500 offices in more than 120 countries. Aon was named the world's best broker by Euromoney magazine's 2008 Insurance Survey. In 2008, Aon ranked highest on the Business Insurance ranking of the world's largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues. Aon also was ranked by A.M. Best as the number one insurance broker based on brokerage revenues in 2007 and 2008, and was voted best insurance intermediary, best reinsurance intermediary, and best employee benefits consulting firm in 2007 and 2008 by the readers of Business Insurance. For more information on Aon, log onto http://www.aon.com/.

Source: Aon Corporation

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