CFA Hits Insurers For Price-Gouging; Industry Calls Report Misleading

The property-casualty industry has “dramatically” increased profits and surplus in recent years, in part by “systematically overcharging for insurance and shifting costs to consumers and taxpayers,” the Consumer Federation of America charged in a report released last week that was blasted by insurers.

The report–first revealed in the Jan. 8 edition of National Underwriter–drew immediate fire from industry trade groups and a securities analyst who characterized it as misleading because it seeks to lump all product lines together, which the critics said is inappropriate.

Moreover, Gary Ransom, a managing partner and p-c industry analyst at Fox-Pitt Kelton, said the report examines the issue of homeowners insurance only for 2006, when it was profitable everywhere, even though overall, “all the premiums ever collected for property insurance in Florida and the Gulf Coast have not covered all the [recent hurricane] claims on those properties.”

The CFA report alleges that, based on “extensive data,” p-c insurers are “paying out lower claims in relation to the premiums they charge consumers than at any time in decades.” It says the combined 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 of financial health, balance sheets for p-c insurers “are in better condition overall than in almost any time in recent history.” (See accompanying sidebar.)

Commenting on the report, J. Robert Hunter, director of insurance for CFA, said that “profits and a solid insurance industry are a good thing, but unjustified profits and excessive capitalization harm consumers.”

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

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

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

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

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

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

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

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

Insurers over the long term “haven't made money in homeowners insurance in coastal areas,” Mr. Ransom said. “Maybe they did in 2006, but so what?

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

Robert P. Hartwig, president of the Insurance Information Institute, explained that “with elevated hurricane activity predicted over the next 15-to-20 years, insurers took advantage of last year's respite to fix the roof while the sun was shining, setting aside billions to bolster the industry's claims-paying capacity.”

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-c insurance companies, as well as the industry in general.”

“Last year was a fortunate anomaly given that in virtually every year over the past two decades, insurers lost money on their core business operations,” he said. “Fortunately for all Americans, the p-c industry had a much better year financially in 2006 than in 2005 or 2004, when we saw record losses from natural disasters.”

Officials of the Property Casualty Insurers Association of America charged that the CFA report “mischaracterizes the facts” involving the profitability of the insurance industry. “Consumers are among the primary beneficiaries of a financially strong insurance industry,” said Genio Staranczak, chief economist for PCI.

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

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

“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,” he said. “However, the industry has historically been less profitable than other sectors of the economy.”

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

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

Mr. Parks said NAMIC's members are committed to holding down insurance rates wherever possible, especially since the vast majority are mutual companies.

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

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