What is so often lost in the criticism of the property-casualty industry is an obvious but too frequently forgotten reality–namely, the value of insurance.
At its core, insurance is the promise of financial protection when there is an unexpected event–whether a major natural disaster or more localized storm, a class-action lawsuit or individual auto claim.
With insurance, individuals and businesses can assume the risks that are inherent in life and business with the security of a strong financial safety net in the event of a loss.
Most recently, the insurance industry collectively paid out nearly $260 billion in losses in the span of just one year. Without insurance, societal innovations and advancement become more risky and less likely to become reality.
Unfortunately, the industry’s very noble purpose and essential function have recently and more frequently been attacked by critics in an effort to justify an activist and anti-industry agenda.
They do this by characterizing insurance as a “public good.” According to the critics, this notion of insurance as a public good justifies overregulation and the socialization of private sector risk management by government at the state or federal level.
There most certainly is a “public good” served by the property-casualty insurance industry. But that “public good” is the well-being of the general public–which is exactly what insurers enhance through claims payments, the purchase of municipal bonds, and investments in bricks, mortar and human capital that support state and local economies.
The risk protection system in this country began as a private sector enterprise. As such, it has effectively served its imperatives throughout the history of the nation.
The long tradition in the United States is for private insurance to serve as our nation’s financial safety net–unless it can be clearly demonstrated that a risk is uninsurable, as is the case with catastrophic terrorism, now addressed by a federal reinsurance program.
Supplanting the private insurance system with governmental programs, prohibiting profits, inflating claims by threatening “bad faith” lawsuits, and other punitive anti-insurer measures will cause irreparable harm to the financial protection mechanism Americans have long relied on when faced with loss.
It is at least ironic, and surely surprising that the industry’s healthy financial condition has to be defended at all. At a time of great concern about massive economic dislocation stemming from the subprime lending crisis, multiline p-c insurers have remained relatively unscathed, due to conservative investments and a long tradition of prudent risk management.
As a result, those insurers, because of careful management, have had the capacity to pay unanticipated claims, including a massive hurricane or earthquake, without needing a government bailout.
One would think that’s good news, yet the critics try to turn the situation against insurers to pursue their own shallow agendas.
They also ignore, of course, that the p-c insurance system is a highly cyclical industry. Years that generate positive earnings contribute to the growth in surplus that helps to sustain insurers in years–and there are plenty of them–when the results are not good.
These good years are vitally necessary to attract and maintain capital, a point which is easily lost by those whose ultimate goal seems to be the end of a private insurance industry.
Forgotten, too, is how fortunate it is that the United States has been spared a major hurricane or earthquake during the last two years. Elsewhere in the world last year, there were four earthquakes exceeding seven on the Richter scale and two Category 5 hurricanes that made landfall in Mexico.
The critics would be very well-advised not to forget that the potential for catastrophic loss in this country is extremely large and growing as the population expands in the areas that are most directly in harm’s way.
Natural catastrophe risk can be managed with the right tools in place. Mitigation and land-use planning, legal and regulatory reform, and appropriate use of federal and state tax incentives are the types of enlightened policies that can make a difference.
But advancing those policies is extraordinarily difficult with the critics, on the one hand, advancing their notions of the “public good,” and policy makers, on the other hand, looking for the path of least resistance instead of confronting and dealing with the real costs of catastrophe risk.
“At a time of great concern about massive economic dislocation stemming from the subprime lending crisis, multiline p-c insurers have remained relatively unscathed…”