Navigating Profitability and Adverse Selection Risks in Habitational and Rental Dwelling Insurance

Navigating Profitability and Adverse Selection Risks in Habitational and Rental Dwelling Insurance

Recent announcements that Progressive Insurance and American Family Insurance will exit the habitational and rental dwelling insurance markets signal growing concerns about profitability in these lines of business.

The departure of these major carriers raises important questions for companies still engaged in these markets, particularly regarding the risk of adverse selection – as competitors withdraw, insurers who remain in the space could experience an influx of higher-risk policies, potentially eroding underwriting profits. For companies that continue to write habitational and dwelling risks, understanding the profitability pressures, engaging in selective underwriting, and refining pricing strategies will be crucial for maintaining a sustainable portfolio.

In early November 2024, Progressive announced that it will be discontinuing its dwelling fire coverage in several states.¹ So far, withdrawal filings have been approved in 22 states² under the American Strategic Insurance Corp. and ASI Insurance brands. According to these filings, the company is in the process of phasing out its dwelling fire line countrywide. Progressive has cited a shift in strategic focus toward owner-occupied homes, condominiums, and contents coverage as the primary reason for this change.³ Since dwelling fire policies typically cover rental properties, they no longer align with the company’s long-term objectives.

This news from Progressive follows a similar announcement from American Family Insurance Group just weeks earlier. In October 2024, American Family revealed plans to discontinue several habitational classifications within their Businessowners Fusion habitation product.⁴ This decision reflects a broader strategy aimed at strengthening the long-term viability of their commercial offerings while supporting growth for their agents. The affected classifications include coverage for condominium and townhome associations, homeowners associations, apartments, and bed & breakfasts.

These shifts are particularly notable in light of profitability challenges that have increasingly pressured the habitational and dwelling insurance markets. Covering rental and multi-unit properties can carry heightened exposure to risks such as fire, water damage, liability claims, and natural catastrophes, all of which contribute to increased claims frequency and severity. As insurers exit, companies that continue to write these policies may face adverse selection, as higher-risk policyholders who have lost their coverage seek alternatives. This influx could lead to a concentration of higher-risk policies, potentially exacerbating loss ratios for insurers who remain in the market.

To mitigate these risks, insurers need to refine their underwriting criteria to better assess and manage risk. Insurers should conduct thorough risk assessments, including detailed property inspections to identify potential hazards and maintenance issues. A comprehensive financial analysis of the property owner can provide insights into their ability to maintain the premises and meet financial obligations. Rigorous evaluation of property management practices can assess their effectiveness in maintaining the property and addressing tenant concerns. An in-depth review of claims history can help identify recurring issues and potential red flags. Because selective underwriting is crucial for success in this market, insurers should focus on properties with strong management teams, solid financial performance, and low-risk profiles.

To accurately price commercial habitational risks, insurers should implement a risk-based pricing strategy. By considering factors such as property age and condition, occupancy rates, location, exposure to natural disasters, and security measures in place, insurers can develop premiums that reflect the specific risk profile of each property. Leveraging data analytics and predictive modeling can help identify trends that may signal increased claim likelihood. Insurers may need to revisit pricing models regularly and ensure premium adequacy, especially in regions with significant risk exposure.

As major players withdraw from habitational and rental dwelling markets, insurers who remain face heightened challenges around profitability and adverse selection. Those committed to these lines will need to strengthen their risk assessment processes, ensure premium adequacy, and adopt underwriting strategies that mitigate frequent or large losses. By taking these steps, companies can adapt to changing market dynamics and maintain a balanced portfolio that supports long-term profitability.

¹ Progressive, “Progressive Home® to Discontinue Dwelling Fire (DP-3) Line of Business for Non-Primary Residences and Rental Property Owners,” news release, November 7, 2024.
² “Progressive (PGR) Q3 2024 Earnings Call Transcript,” The Motley Fool, November 5, 2024.
³ Progressive, “Progressive Home® to Discontinue Dwelling Fire (DP-3).”
⁴ Terrence Dopp, “AmFam Exits Some Large Habitational Lines, Sheds Some Missouri Staff,” Best’s News, October 18, 2024.