Property-casualty insurers are getting rich by "methodically overcharging consumers," reducing coverage, underpaying claims and having taxpayers pay some of the tab for risks that carriers should cover, the Consumer Federation of America charged in its latest salvo against the industry.

Using a number of common measures of financial health, the CFA study found that despite the fact "balance sheets for property-casualty insurers are in better condition overall than at any time in history," with record profits and low losses in recent years, prices remain too high for too many buyers.

The report came under immediate fire from insurer representatives as a repetition of old and "misleading" allegations, with Insurance Information Institute President Robert P. Hartwig calling it "fatally flawed."

The report said the industry's "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," the report added.

"Consumers ultimately pay the price for the unjustified profits, padded reserves and excessive capitalization that exist right now in the insurance industry," said CFA's director of insurance, J. Robert Hunter.

He said his analysis indicates that "over the last four years, the typical American family has paid $870 too much" for their p-c insurance coverage.

Mr. Hunter's study estimates that insurer after-tax profits for 2007 are about $65 billion--just under the record level set in 2006. If insurers release even a small part of their swollen reserves as profits, the total for 2007 will exceed those of 2006, he said.

Total industry profits from 2004 to 2007 are estimated to be $253.1 billion, he added.

Meanwhile, he said the industry's loss and loss adjustment expense ratio for 2007 is estimated to be 66.7--the second-lowest in the 28 years studied. Five of the seven lowest loss and LAE ratios in the last 28 years have occurred since 2003, according to Mr. Hunter.

He said CFA's study also estimates that, in 2007, publicly traded insurers will earn a return on equity of over 19 percent--well in excess of what is required by investors, Mr. Hunter contends.

The lower industrywide ROE that insurers report--about 14 percent--underestimates the industry's actual return, according to Mr. Hunter, who is a former actuary, Texas insurance commissioner and federal insurance administrator.

Insurers, according to CFA's analysis, "have succeeded at being insulated from risk" through the "wise use of reinsurance," he noted. But he said profits were unfairly boosted through anti-concurrent causation clauses, caps on rebuilding costs, limits on compensation for bringing a building up to code, and through unreasonable price hikes.

He said that while some markets are seeing prices come down a bit--mostly away from coastal areas--such reductions are "too little, too late," adding that "much more needs to be done."

Insurers, according to Mr. Hunter, have maintained "sharp limits on coverage and availability" while imposing "harsh homeowners rate increases and using computer-designed programs created to systematically underpay claims."

Mr. Hunter said taxpayer subsidies have also reduced insurer costs, citing the Terrorism Risk Insurance Act that Congress extended last year. The CFA study estimates that insurance companies have received a subsidy of about $4 billion to date because they do not have to pay premiums for the terrorism reinsurance provided by the federal government.

"Some insurers have urged Congress to create a similar program to cover natural disasters," Mr. Hunter noted.

Insurers have also received significant taxpayer support at the state level, he said, through the creation of pubic "insurers of last resort." The existence of such residual markets allows insurers to "cherry pick" by insuring lower-risk households themselves while dumping higher-risk ones on the state carrier, he added.

"Only Florida has taken steps to end this practice," he said.

Insurance association leaders lined up to defend the industry and counter allegations of price-gouging and market misconduct by CFA and Mr. Hunter.

Mr. Hartwig, an economist by trade, in a statement called the study "fatally flawed" and said it "grossly distorts the financial position of auto, home and business insurers."

Mr. Hartwig said the study criticizes private auto and home insurers but actually includes data from government-run insurers that sell, among other coverage, workers' comp insurance, thereby artificially inflating its figures for industry-retained earnings or policyholder surplus.

The CFA, he said, "compounds this error by double-counting tens of billions of dollars in surplus on the books of individual insurers. Consequently, the CFA overstates the industry's claims paying capacity by approximately $160 billion in 2007."

CFA, Mr. Hartwig, said, estimates that policyholder surplus in 2007 totaled $687 billion, when the actual figure is approximately $530 billion--a difference of 30 percent.

An improved capital position, said Mr. Hartwig, will help insurers pay future large-scale disaster losses, as well as meet higher capital requirements imposed on them by rating agencies in the wake of storms like Hurricane Katrina--which, he noted, produced insured losses of $41 billion.

Mr. Hartwig also challenged the notion that insurers were paying less to consumers. "Insurers are protecting more cars, homes and businesses than any time in U.S. history, and have been an essential component of the country's economic growth engine for decades," he said.

"The insurance industry has paid out hundreds of billions of dollars in insured losses over the past few years, and insurance proceeds constituted the single largest source of critically needed funds contributing to the stabilization and recovery of the Gulf Coast's economy after Hurricane Katrina. So to say claims payouts continue to drop is absurd," he concluded.

"Predictably, Bob Hunter and the Consumer Federation of America are once again ignoring the facts and using the same old, tired arguments to mislead the public into believing something that isn't true," said Marc Racicot, president of the American Insurance Association.

"Each year, the CFA issues another report with essentially the same allegations, and its most recent claims of market misconduct are no more reflective of the actual market conditions than they were when they issued a similar report a year ago," said David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America.

"A healthy and strong insurance industry is good for consumers, because this enables insurers to have sufficient capital to pay claims when major catastrophes occur and spurs greater competition among companies," he added.

PCI said that according to data compiled by MarketScout--an online market out of Dallas that produces a monthly "Market Barometer" survey--rates as of November 2007 were down 15 percent on a composite basis for all U.S. commercial coverage.

PCI also noted that the November 2007 Consumer Price Index for personal auto insurance was up only about 0.2 percent--much less than the 4.3 percent increase in overall consumer inflation.

"Profits for 2007 are in large part due to a year that has been absent of major catastrophe losses, and only offset less-than-stellar returns achieved in previous years," PCI said in a statement.

Despite the financial health of the industry as a whole, PCI officials noted that industrywide figures are for all lines of business--from auto to workers' comp, and in all parts of the country.

"The national numbers demonstrate that through investment gains and sound risk management in states not exposed to the extremes of hurricane losses, the industry is performing well," said PCI's chief economist, Genio Staranczak.

Franklin W. Nutter, president of the Reinsurance Association of America, focused on the CFA report's comment that "in recent years, insurers have reduced their financial risk by the wise use of reinsurance."

Indeed, he said, reinsurers have made "extraordinary financial contributions in response to the most significant series of catastrophic events in U.S. history," adding that "since 2000, reinsurers have paid roughly $20 billion for 9/11 claims; $3 billion in claims for the 2004 hurricane season; and $27 billion in claims for Hurricanes Katrina, Rita and Wilma in 2005."

However, such losses cost the industry dearly, he said, noting that "reinsurers did not make an underwriting profit in the U.S. for over 20 years, until 2006 and 2007, when no major hurricanes hit U.S. soil."

Indeed, he added, "in 2001, reinsurers paid $1.40 in claims and expenses for every dollar of premium," and $1.26 in 2005.

"It is curious," Mr. Nutter said, "that the CFA report would recommend more state government reinsurance funds, like Florida's, yet soundly criticize government and taxpayer-backed subsidies for insurers, upon which the Florida fund is based. What is the logic of more state taxpayer-funded reinsurance to insurers in the context of criticizing insurer profits?"

Calls for "actuarially" sound state reinsurance, per the CFA report, "defy experience and political logic," according to Mr. Nutter.

Pointing to broker reports for the Jan. 1 reinsurance renewals that highlight abundant reinsurance capacity for catastrophe risk, dropping rates and a "buyer's market," the CFA is correct about one thing, he added--the reinsurance market wants to write catastrophe risk.

Thus, suggested Mr. Nutter, "encourage [private reinsurance], don't displace it with expanded taxpayer subsidies to insurers through state reinsurance programs."

Special Reports /

Insurers Counter CFA Report Blasting Carriers For 'Overcharging'

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