After five years of good results, the homeowners’ insurance industry is looking at a number of challenges in the near future, with everything from hurricanes to the housing crisis as potential problems.

One major concern – as for every business – is the current financial downturn, according to Alan Dobbins, an analyst at Conning Research and Consulting in Hartford, which released a study on the industry: “The Homeowners Insurance Market: The Eye of the Storm.”

While personal lines insurers don’t have the same exposures as banks and some of the multi-line companies, their fortunes are tied to the same economic conditions that affect consumers.

“The real revenue driver would be the number of homes that are out there and the replacement costs of those homes, and the current economy doesn’t bode well for either of those,” Dobbins said.

The fluctuating real estate market has also harmed the insurance-to-value ratio: Not only is a poor ratio leaving money on the table for the insurers, it creates bad public relations if a loss happens and the insureds discover they don’t have enough coverage. As replacement costs rise, agents must make sure their customers are covered, which is easier in a time of increasing home values. But now that values are decreasing, some insureds may need to increase their insurance bill anyway – and that’s a much tougher sell.

Banking On Disaster

The industry has benefited recently from very light catastrophe seasons, he said. When there are a lot of catastrophes, like in 2005, insurers increase rates in exposed locations after paying out a lot of claims. If that season is followed by a light one, they can have very profitable underwriting results. But that volatility works both ways, Dobbins said, and what looks like a hefty profit for an insurer one year could turn into a loss very quickly the next.

Another concern is the regulatory environment, especially in high-risk states where the legislature has kept rates artificially low. There are also a range of proposals to provide some sort of federal backstop for catastrophic insurance – but the concern remains that making catastrophic insurance easier to obtain will only spur the demographic shift to the coasts. Demographics are “a real issue for the industry – for society perhaps. People still flock to these high-risk locations,” Dobbins said.

“What the industry is in favor of is allowing pricing to match exposure,” he said. “What you are looking for is a signal to builders and buyers that this is a high-risk location. But when rates are suppressed and not allowed to match exposure that blunts the signal to people.”

In addition, the current regulatory environment is in flux, he said, and that makes planning for the future difficult for any kind of insurer.

“The tendency is probably greater for regulators to become more involved in the market when times are difficult. There’s a constituency they are looking to protect when times are tough.”

The most successful insurers are taking their cue from the auto insurance industry, which has successfully used technology to improve underwriting. “A lot of it is greatly enhanced technology and data gathering,” Mr. Dobbins said, which will allow the homeowners’ insurance industry to weather the storms ahead.