NU Online News Service, Feb. 21, 2:16 p.m.EST

Insurers are shifting the cost of risk to consumers andtaxpayers, side stepping their traditional role of risk-takers andbecoming experts at risk-avoidance, according to a report from theConsumer Federation of America.

The study titled, “The Insurance Industry's Incredible DisappearingWeather Catastrophe Risk,” asserts that insurers are shiftingthe cost of risk away from the industry onto consumers andtaxpayers, a point strongly disputed by industry experts.

“In the last twenty years, insurers have been so successful atshifting costs to consumers and taxpayers that they are currentlyovercapitalized and cannot justify higher homeowners' rates,” saysJ. Robert Hunter, director of insurance for the CFA.

The report says that some savings insurers have achieved, suchas the use of reinsurance, securitization of risk, and other “wiserisk diversification strategies” are legitimate. However, insurersare faulted for hollowing out coverage to homeowners “by increasingdeductibles and capping the amount they will pay if the home isdamaged and destroyed.”

The CFA also questions rate increases that have been granted“sometimes using questionable computer rate models.”

Insurers are also criticized in the report for the use of“anti-concurrent causation clauses” that allow insurers to avoidpaying a claim for a loss due to wind if there was also flooddamage at the same time.

These practices have allowed insurers to increase their surplus,even in times when catastrophic loss events should have caused adrop in industry surplus, CFA says. For example, CFA explains thatits studies show no noticeable drop in surplus following the fourhurricanes that hit Florida in 2004 and Hurricane Katrina in2005.

To underscore the erosion in risk taking, the report says thatin 1992, when Hurricane Andrew hit, insured losses accounted for 64percent of the overall loss. By contrast, insured losses forHurricane Katrina accounted for 50 percent of overall losses.

To remedy this situation, CFA says state regulators need tocarefully examine rate requests and review the reasons behindcarriers exiting markets. The use of anti-concurrent languageshould also be banned. Regulators, and not insurers, shoulddetermine when a storm is classified as a hurricane in a state.

States should also join together to form interstate compacts toshare in hurricane risks to provide a pool of policies and tospread risk.

At the federal level, CFA calls on the Federal Insurance Officeto accumulate data similar to what is required of banks under theHome Mortgage Disclosure Act, allowing for detailed analyses ofmarket stress. The federal government should also assist in theformation of the interstate compacts.

CFA says insurers should take on risk for both flood andterrorism. The group calls the current system “a huge policyerror.”

Robert Hartwig, president of the Insurance InformationInstitute, disputes CFA's assertions in a statement and notes thatthe industry paid a cumulative $408 billion in catastrophe claimsbetween 1990 and 2011. The payout from natural catastrophes grewseven-fold between 1960 and 2010, he says, and has accelerated evenmore over the last two decades.

Hartwig went on to says that the spring tornado season in theUnited States in 2011, along with severe winter weather andHurricane Irene, reduced policyholder surplus by more than 3percent to $539 billion as of Sept. 30, 2011.

He also notes that the approval of hurricane deductibles haveallowed for the writing of more private-sector coverage in coastalareas “than would otherwise be the case.”

The Heartland Institute—a free-market think tank—declared theCFA's report “dead wrong.”

R.J. Lehmann, deputy director, center of finance, insurance andreal estate for the institute, is critical of the CFA's analysis ofsurplus because it measures the whole industry and not justhomeowners. He further argues that insurers' primary“responsibility to policyholders is to remain solvent” so it canpay claims.

“Given the rampant irresponsible risk-taking we have seen by somany segments of the financial services industry in recent years,[property and casualty] insurers should be commended for taking aresponsible approach to parsing and pricing risk appropriately,” hesays.