The property-casualty industry has “dramatically” increasedprofits and surplus in recent years, in part by “systematicallyovercharging for insurance and shifting costs to consumers andtaxpayers,” the Consumer Federation of America charged in a reportreleased last week that was blasted by insurers.

The report–first revealed in the Jan. 8 edition of NationalUnderwriter–drew immediate fire from industry trade groups and asecurities analyst who characterized it as misleading because itseeks to lump all product lines together, which the critics said isinappropriate.

Moreover, Gary Ransom, a managing partner and p-c industryanalyst at Fox-Pitt Kelton, said the report examines the issue ofhomeowners insurance only for 2006, when it was profitableeverywhere, even though overall, “all the premiums ever collectedfor property insurance in Florida and the Gulf Coast have notcovered all the [recent hurricane] claims on those properties.”

The CFA report alleges that, based on “extensive data,” p-cinsurers are “paying out lower claims in relation to the premiumsthey charge consumers than at any time in decades.” It says thecombined ratio appears to be the lowest on record in 50 years,which “indicates the highest profit levels in recent history.”

The CFA study said that using a number of common measures offinancial health, balance sheets for p-c insurers “are in bettercondition overall than in almost any time in recent history.” (Seeaccompanying sidebar.)

Commenting on the report, J. Robert Hunter, director ofinsurance for CFA, said that “profits and a solid insuranceindustry are a good thing, but unjustified profits and excessivecapitalization harm consumers.”

The study's author, Mr. Hunter–a former Texas insurancecommissioner–said the report estimates after-tax returns forinsurers for 2006 at $60 billion, while profits for the recordyears of 2004, 2005 and 2006 are estimated to be $149.2billion.

The loss and loss adjustment expense ratio for 2006 is estimatedto be 68.3–the lowest in 27 years, he noted. The years 2003 through2006 represent four of the six lowest loss and LAE ratios in thelast 27 years, Mr. Hunter added.

“Representatives of the insurance industry often claim that highpremiums and profits are necessary to compensate for the high risksthey bear,” said Mr. Hunter.

In fact, he contends, “insurance is a low-risk investment,”explaining that using standard measures of stock market performancethat assess financial safety and stock price stability, the p-cindustry represents “a below-average risk compared to all stocks inthe market–safer than investing in a diversified mutual fund.”

“By any measure, 2006 profits are excessive,” the CFA reportsaid. “The astonishingly low loss ratio report means that consumersare receiving record low payouts for their premium dollars asinsurers reap unprecedented profits.”

Mirroring what industry trade group representatives said, Mr.Ransom of Fox-Pitt Kelton conceded that some of Mr. Hunter'sstatements “are factually correct.”

Mr. Ransom said that “2006 was one of the best years the p-cindustry has had in a very long time,” but noted that a number ofCFA criticisms deal with homeowners insurance on the Gulf Coast andFlorida.

“[CFA] makes the claim that the industry has made a lot of moneyin general, across all lines of business, and focuses in on the onearea where insurance companies have lost money dramatically–thehomeowners' business in coastal areas,” he said.

Insurers over the long term “haven't made money in homeownersinsurance in coastal areas,” Mr. Ransom said. “Maybe they did in2006, but so what?

“The problem is that he is painting with a broad brush howinsurers are making lots of money, and made money in '06, implyingthat they are cancelling people in areas where they are makingmoney,” according to Mr. Ransom. “That is not the case. In acompetitive marketplace, insurers actually want customers if theyare profitable.”

Robert P. Hartwig, president of the Insurance InformationInstitute, explained that “with elevated hurricane activitypredicted over the next 15-to-20 years, insurers took advantage oflast year's respite to fix the roof while the sun was shining,setting aside billions to bolster the industry's claims-payingcapacity.”

At the same time, insurers are lowering rates for most drivers,many homeowners and a wide variety of businesses, according to Mr.Hartwig–a point backed up by Mr. Ransom.

Marc Racicot, president of the American Insurance Association,called the CFA “allegations” an “unfounded attack on individual p-cinsurance companies, as well as the industry in general.”

“Last year was a fortunate anomaly given that in virtually everyyear over the past two decades, insurers lost money on their corebusiness operations,” he said. “Fortunately for all Americans, thep-c industry had a much better year financially in 2006 than in2005 or 2004, when we saw record losses from naturaldisasters.”

Officials of the Property Casualty Insurers Association ofAmerica charged that the CFA report “mischaracterizes the facts”involving the profitability of the insurance industry. “Consumersare among the primary beneficiaries of a financially stronginsurance industry,” said Genio Staranczak, chief economist forPCI.

At the same time, 2006 profits are in large part due to a yearthat has been absent any major catastrophe losses, and only offsetfar-less-than-stellar returns in previous years, according to Mr.Staranczak.

Despite the financial health of the industry as a whole, it'simportant to note that CFA's figures are for all lines ofbusiness–from auto to workers' compensation–in all parts of thecountry, he pointed out.

“The national numbers demonstrate that through investment gainsand sound risk management in states not exposed to the extremes ofhurricane losses, the industry is performing well,” he said.“However, the industry has historically been less profitable thanother sectors of the economy.”

Carl Parks, senior vice president of government relations at theNational Association of Mutual Insurance Companies, said: “Therecent positive financial news for 2006 is good for consumers aswell as insurers…It means insurers are starting to recover from thedevastating effects of the 2004 and 2005 hurricane years.”

“The fact is insurance rates for drivers and homeowners in mostareas of the country are being reduced,” according to Mr. Parks.“The exceptions are the hurricane-prone areas of the Gulf Coast andthe eastern coast of Florida, which remain vulnerable to severeweather.”

Mr. Parks said NAMIC's members are committed to holding downinsurance rates wherever possible, especially since the vastmajority are mutual companies.

“Wall Street does not drive our business,” he said. “Our memberscontinually strive to do what's right for the policyholders, sincethey–rather than stockholders–own the insurance companies.”

Mr. Parks said he hopes this week's special session of theFlorida Legislature will result in much needed improvements to thatstate's insurance climate. “Lawmakers need to work with insurers,homeowners and others to seize the opportunity to forge a long-termsolution,” he said.