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Thanks to Stuart Israel, Esq. of Israel, Israel & Purdy, LLP for finding this.
This comes from the Consumer Federation of America, a non-profit association of 300 consumer groups. The full report is available here. Normally, I block quote these things, but I would waste too much space, so I'm leaving it as normal text. Below you'll find excerpts from the report.
State and national consumer organizations joined the Consumer Federation of America (CFA) today to release a new study concluding that the property/casualty insurance industry continued in 2007 to systematically overcharge consumers and reduce the value of home and automobile insurance policies, leading to profits, reserves, and surplus that are at or near record
levels. The study estimates that insurer overcharges over the last four years amount to an average of $870 per household.
The report provides extensive data demonstrating that property/casualty insurance companies are paying out lower claims in relationship to the premiums they charge consumers than at any time in decades. The pure loss ratio, the actual amount of each premium dollar insurers pay back to policyholders in benefits, was only 54.6 cents in 2007. Over the past 20 years, the amount paid back as benefits has dramatically declined from over 70 cents per premium dollar, indicating a huge loss in the value of insurance to consumers.
“Consumers ultimately pay the price for the unjustified profits, padded reserves, and excessive capitalization that exist right now in the insurance industry,” said J. Robert Hunter, the Director of Insurance for the Consumer Federation of America (CFA) and author of the study. Hunter is an actuary, former state insurance commissioner, and former federal insurance administrator.
“The insurance industry reaped record profits in 2004 and 2005, despite significant hurricane activity,” said Hunter. “Profits in 2006 rose to unprecedented heights and 2007 may set a fourth consecutive profit record,” he said. “Unfortunately, a major reason why insurers have reported record-high profits and low losses in recent years is that they have been methodically overcharging consumers, cutting back on coverage, underpaying claims, and getting taxpayers to pick up some of the tab for risks the insurers should cover,” said Hunter.
Using a number of common measures of financial health, the study finds that balance sheets
for property/casualty insurers are in better condition overall than at any time in history.
Claim Payouts Continue to Drop
Consumers have experienced a startling drop in the amount of premium paid in benefits by the insurers, from 72 percent in the late 1980s to only 60 percent today when plotted on a straight- line trend over the period.
Insurance is a Low-Risk Investment
Representatives of the insurance industry often claim that high premiums and profits are necessary to compensate for the excessive risks they must bear. In fact, insurance is a low-risk
investment. Using standard measures of stock market performance that assess financial safety and stock price stability, the property/casualty insurance industry represents a below-average risk compared to all stocks in the market, safer than investing in a diversified mutual fund.
In 2007, the study estimates that stock insurers will earn a return on equity (ROE) of more than 19 percent, well in excess of what is required by investors. The lower industry-wide ROE that insurers report underestimates the industry’s actual ROE.
Surplus is Unprecedented: Insurers are Overcapitalized
The study estimates that retained earnings, or surplus, for the entire industry was $687 billion at the end of 2007. An adequate surplus guarantees a safe insurance industry, but this amount
is excessive by any legitimate measure. To assess the financial solidity of an insurance company,
regulators examine the ratio of net premium written to surplus, which, at the lowest level ever, 0.66 to 1 (66 cents of premium written for every dollar of surplus), is less than half of the extremely safe 1.5 to 1 ratio that is recommended by many observers and far less than the famous “Kenny” rule of 2 to 1 as an efficient surplus level. The largest loss ever suffered by the insurance industry, Hurricane Katrina, represented an after-tax loss of $26.7 billion, or 4 percent of current surplus when adjusted to 2007 dollars. The $12.2 billion in after-tax losses experienced by insurers afterthe September 11th terrorist attacks amounts to 2 percent of surplus. Many insurers are engaged in massive stock buy-back programs and the purchase of other corporations with this excess capital. Insurance chief executive officers now have the highest average cash compensation of any industry in America. Even the Insurance Information Institute (III) admits that the industry is overcapitalized: “…there is excess capital in the industry today – estimated by some analysts to beas much as $100 billion…” The excess capital approaches $175 to $200 billion if reserve redundancies (see below) are eliminated.
Insurers Have Lowered Risk and Maximized Profits through Legitimate and Illegitimate Means
In recent years, insurers have reduced their financial risk by making wise use of reinsurance
and other risk-spreading techniques, such as securitization. However, the study cites several tactics that insurers have also used to shift costs and risk onto consumers and taxpayers. Some of the questionable methods that insurers have used to shift risk include:
• Sharp limits on coverage and availability. Insurers have imposed large hurricane deductibles, capped home replacement and rebuilding costs, added new exclusions such as mold, and placed unjustifiable restrictions on claims. For example, “anti-concurrent- causation” clauses, now in wide use, attempt to strip all coverage for hurricane damage if a non-covered event like a flood occurs, even if the flood hits hours after a home is destroyed by wind. Some insurers have canceled policies, refused to renew policies, or refused to write new coverage in coastal areas and entire states from Texas to Maine.
• Harsh homeowner’s rate increases. Insurers have imposed sharp rate increases on many
homeowners throughout the nation. A major reason for these recent increases is that insurers
are relying on short-term predictions of potential weather disasters, reneging on promises to
use more scientific long-term computer predictions.
• Programs designed to systematically underpay claims. Many insurers are now using new computer-directed programs like “Colossus” and “Claims Outcome Advisor” that allow insurers to determine the amount of overall claims savings they want to achieve before claims are assessed for legitimacy.
• Taxpayer subsidies. Insurers and real estate interests were the major proponents of the
Terrorism Risk Insurance Act, which Congress recently continued under industry pressure.
The study estimates that insurance companies have received a subsidy of about $4 billion to
date because insurance companies do not have to pay premiums for the reinsurance provided
by the federal government. Some insurers have urged Congress to create a similar program
to cover natural disasters. Insurers have also received significant taxpayer support at the
state level, through the creation of state directed “insurers-of-last-resort.” The existence of
these companies allows insurers to “cherry pick,” by insuring lower risk households themselves and sending higher risk households to the state company. Only Florida has taken steps to end this practice.
“Insurers have been so successful in shifting their risk onto consumers and taxpayers that
they have produced record profits during a period of increased storm destruction,” said Hunter.
“This risk shift is reflected by the fact that insurers are paying less and less of the premium dollars they receive in benefits to consumers.”
There was a good amount of discussion on this same issue not too long ago on this blog. Here is an excerpt:
Auto insurers reported $10.5 billion in earned premiums in New York in 2005, a jump of nearly 29 percent from $8.2 billion in 2000. Meanwhile, during the same period, incurred losses plummeted by more than 20 percent, from $6.4 billion to $5.1 billion. From 2000 to 2005, the loss ratio (the amount of each insurance premium dollar that goes to pay claims) in New York fell from 78.3 percent to 48.4 percent of premiums, according to the National Association of Insurance Commissioners (NAIC). This means that in 2005 only 48.4 cents of each premium dollar was paid to policyholders, a nearly 30 percentage point drop from 2000. The 2005 New York loss ratio was the lowest in the nation and was 11.8 percentage points below the nationwide loss ratio of 60.2 percent.
You can view the entirety of that post here, including differing opinions. I'm sure this recent post will generate a good amount of conversation.
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