New Report Accuses Insurers of Repeatedly ‘Manufacturing’ Crises

A new study from a nationwide coalition of consumer advocacy groups accuses property/casualty insurers of overstating their industry’s financial losses from natural disasters including Hurricane Irene in order to create a perceived insurance crisis “for the purpose of price-gouging buyers of insurance.”

The study, “Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America,” claims insurers have a decades-long history of generating excessive profits by manufacturing crises that clear the way for astronomical increases in premiums.

For the past 35 years, the report from Americans for Insurance Reform (AIR) states, “policyholders have been victims of this industry’s little-understood economic cycle, created by anticompetitive (yet legal) underwriting practices, unique and opaque accounting policies and virtually unchecked power when it comes to regulation of insurance rates.”

Industry leaders have been swift to dismiss those claims, with Robert Hartwig—president and chief executive officer of the Insurance Information Institute (III)—saying in a statement that the study’s authors “could not possibly come across as more oblivious to the risks associated with devastating natural disasters and global economic volatility.”

“Buyers of (coverage) are the primary beneficiaries of a financially strong, stable and secure insurance industry,” Hartwig said.

Hard and Soft Markets

The report by AIR—a project of the Center for Justice & Democracy at New York Law School that includes nearly 100 consumer groups—says the industry’s economic cycles cause period shifts between so-called “soft” and “hard” markets.

The soft market is defined as having relatively low or stable rates and heavy competition between insurers battling to take advantage of low interest rates in order to invest as much policyholder money as possible. That competition forces rates extremely low—potentially sinking some insurers.

Hard markets, by contrast, are characterized by sudden and extreme hikes that can make rates prohibitively expensive for all consumers.

The study’s authors say coverage providers make plenty of profit in either circumstance, whatever their financial reports say. That is because—according to AIR—insurers rarely take in enough money in policy payments alone to outweigh underwriting expenses and losses.

Profits Come from Investments, Not Underwriting

According to the study, the property/casualty industry as a whole has posted an underwriting profit in only 7 of the last 44 years and last year registered a 2.1 percent loss.

Meanwhile, “insurers’ surplus—the extra cushion they hold in addition to the amount they have set aside to pay estimated future claims—rose by a factor of almost 40,” the study states.

According to industry statistics cited in the study, last year’s annual surplus for insurers totaled $580 billion.

AIR researchers say most of the industry’s profits come instead from investing customer premiums for the period between an insurer’s taking a premium payment and its having to pay out on it. Because that time frame can range from roughly 15 months on auto policies, according to AIR, to as long as 10 years for medical malpractice coverage, competition can be fierce.

Study co-author Joanne Doroshow said cyclical shifts tend to affect private lines—including the auto and homeowner coverage markets—to a lesser extent than commercial lines, in part because the latter generally have longer lag times before companies must pay out on claims.

Also, private consumers tend to be less knowledgeable and less prone to being affected by jockeying in the marketplace.

“But that doesn’t mean private lines won’t be affected,” Doroshow—an attorney and co-founder of AIR with decades of experience working on civil justice and insurance issues—said in a telephone interview.

Private auto coverage is protected to a greater extent, at least in theory, than most other lines also by the fact that insurers are legally required to get any rate hikes approved in advance by commissioners in each state nationwide. Doroshow says that has helped keep cheap auto insurance rates available for consumers in a few states that have passed legislation protecting consumers, but in many others, regulators lack staff members and resources and “tend to just rubber stamp rate increase proposals.”

Loss Levels Are Not What They Seem

The AIR report states that even losses reported by insurers are not what they seem, because companies  base their calculations on “incurred losses,” which factors in not only those claims already paid but also “estimates of future claims that they do not even know about yet, which can be (and are, during hard markets) wildly exaggerated.”

The United States has been in a soft market for the past five years, the report says, but insurers are using Irene and other natural disasters this year—which have racked up tens of billions of dollars in insured losses, according to industry estimates—to try to push the nation back into another hard market that will allow them to increase rates and increase profits greatly.

The study’s authors say industry officials typically deny any involvement in cyclical markets, instead lobbying for states to pass tort reform legislation to limit policyholders’ ability to file lawsuits against coverage providers or cap the extent of possible damage awards.

The III’s Hartwig counters that the report, among other things, underestimates the impact of the $30 billion in losses suffered by insurers nationwide this year by Irene and other catastrophes.

“The fact that insurers and reinsurers entered 2011 with record capital on hand to pay claims is unambiguously a good thing for all policyholders,” Hartwig said in a statement on III’s website. “Moreover, over the past four years, while the Great Recession and its aftermath forced hundreds of thousands of businesses to fail, including hundreds of banks—not a single traditional property/casualty insurer failed as a result of the financial crisis, and not a single valid claim went unpaid.”

About Matthew Morisset
Matthew Morisset is a proud alumnus of the University of Redlands, where he obtained a degree in English Literature. Utilizing his passion for analysis and writing, Matthew looks for important trends in the auto insurance industry and their implications for consumers and the market as a whole.

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