Consumer Federation Report Rips Insurer Overcharges

WASHINGTON--Property-casualty insurers are getting rich by "methodically overcharging consumers," reducing coverage, underpaying claims and having taxpayers pay some of the tab for risks insurers should cover, the Consumer Federation of America said in a report today.

Using a number of common measures of financial health, the study found that "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.

The report came under immediate fire from insurer representatives as a repetition of old and "misleading" allegations and an industry economist called it "fatally flawed."

The report said the "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 J. Robert Hunter, CFA director of insurance, who unveiled the report at a press conference.

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 after-tax returns 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, final profits for 2007 will exceed those of 2006, he said. Profits for the record years of 2004, 2005, 2006 and 2007 are estimated to be $253.1 billion.

And, he said the loss and loss adjustment expense (LAE) ratio for 2007 is estimated to be 66.7 percent, 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, Mr. Hunter said his analysis had determined.

He said his study also estimates that, in 2007, publicly traded insurers will earn a return on equity (ROE) of more than 19 percent, well in excess of what is required by investors.

The lower industrywide ROE that insurers report underestimates the industry's actual ROE, Mr. Hunter said.

Insurers, according to his analysis, "have succeeded at being insulated from risk."

They have done this through the "wise use of reinsurance," which he praised, but also through such means as anti-concurrent clauses in policies, caps on rebuilding costs, caps on compensation for bringing a building up to code, and through price hikes.

He noted that some markets are seeing prices come down a bit, mostly away from coastal areas, but called it "too little, too late and said that "much more needs to be done."

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

Mr. Hunter said taxpayer subsidies have also reduced insurers' costs, mentioning the Terrorism Risk Insurance Act that Congress extended last year. The 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 said.

Insurers have also received significant taxpayer support at the state level, through the creation of state-directed "insurers of last resort," he said. The existence of these companies allows insurers to "cherry pick," by insuring lower risk households themselves and sending higher risk households to the state company.

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

Marc Racicot, president of the American Insurance Association, said in a response: "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."

David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America (PCI), said, "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."

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 in a statement that according to data compiled by MarketScout in Dallas, rates as of November 2007 were down 15 percent on a composite basis for all business property and casualty coverage placed in the United States.

In addition, according to PCI, the report said that the November 2007 consumer price index for personal auto insurance was up only about 0.2 percent from last year--much less than the 4.3 percent increase in overall consumer inflation recorded during the same period.

"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," PC said.

Despite the financial health of the industry as a whole, it is important to note that these figures are for all lines of business--from auto to workers' compensation--in all parts of the country, PCI officials said.

"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 Genio Staranczak, PCI's chief economist.

Robert Hartwig, also an economist as well as president of the Insurance Information Institute, in a statement called the study "fatally flawed" and said it "grossly distorts the financial position of auto, home and business insurers."

Mr. Hartwig pointed out that the CFA study criticizes private auto and home insurers, but actually includes data from government-run insurers that sell, among other things, workers' compensation 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 catastrophe losses and meet higher capital requirements imposed on them by ratings agencies in the wake of storms like Hurricane Katrina (which produced $41 billion in insured losses).

Mr. Hartwig 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.

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

The benchmark for this accurate observation, Mr. Nutter observed, is that in contrast to the report's themes, reinsurers have made "extraordinary financial contributions in response to the most significant series of catastrophic events in U.S. history."

"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 Hurricane Katrina, Rita and Wilma in 2005," he said in a statement.

"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," he noted

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, he added, "encourage it, don't displace it with expanded taxpayer subsidies to insurers through state reinsurance programs."