New home and car sales may be down, limiting exposure growth, but insurers benefit from fewer drivers on the road in times of high unemployment as claims frequency declines, the rating agency says.

For auto insurers, Moody's says it expects usage-based insurance to gain momentum, and notes that carriers that are at the forefront of offering such products will gain a competitive advantage by being able to develop more-sophisticated loss-cost models based on information gleaned from telematics devices.

Moody's says, “Currently, insurers use a few variables as proxies for good or bad driving begavior—age, gender, driving history, and in some states credit score. Usage-based insurance would allow insurers to use concrete vehicle operation data, resulting in improved, more-sophisticated loss-cost modes based on variables more-correlated with actual driving behavior, with the goal of more-accurate pricing and better risk segmentation.”

Auto rates continue to rise moderately, combined ratios have been relatively profitable since 2003, and auto claims frequency in 2010 was “generally benign, given little change in total miles driven from the previous years,” Moody's says.

For homeowners insurers, Moody's notes that, according to Munich Re, 2011 first-half weather events have caused losses of nearly $18 billion, more than twice the January-to-June average over the past 10 years. “These figures will negatively impact personal insurers' results for 2011, and in some cases materially,” Moody's says. Insurers are also exposed to more-frequent but less-severe weather events like tornadoes and hail storms.

The rating agency explains that reinsurance protection for these losses is limited, as it is often prohibitively expensive to purchase.

All told, Moody's says above-average 2011 weather losses have reduced earnings by 80 percent for personal-lines insurers collectively, not including the impact of Hurricane Irene.

Like auto insurance, homeowners rates have risen, driven by insurers' responses to the weather events. Combined ratios, though, have been volatile because of these events.

Exposure to natural catastrophes continues to increase due to demographic shifts toward coastal regions, Moody's notes, but the risks are increasingly being written by public systems rather than private insurers.

“Property insurance coverage provided by these involuntary [public] programs has significantly increased over time,” Moody's says. “According to the Insurance Information Institute, total policies in force—both habitational and commercial—in the nation's state-sponsored insurance pools collectively nearly tripled from 0.9 million in 1990 to 2.8 million policies in 2010, a record high.”

Moody's notes that these systems usually charge rates below levels that reflect actuarially-sound prices, discouraging private insurers from competing in these areas.

Generally, for personal-lines insurers, Moody's says it expects core underwriting earning—excluding catastrophes and investment gains/losses—to “stay relatively stable over the next 12 to 18 months, given rational, though high, competitive behavior and the rising rate environment.”