Big Oil Takes The Cake!

Critics keep hammering property-casualty insurers for making too much money, yet their profits pale in comparison to Big Oil. Exxon Mobil alone reported a record $40.6 billion in net income last year, compared to $49.4 billion for the entire p-c industry combined through three-quarters. What gives?

Most people have no problem with state governments limiting what insurers can charge for homeowners, auto or other critical coverages.

In fact, if carriers don't bend to the will of politically-motivated politicians and regulators, they get sued, have their licenses revoked, or are extorted by threats to take away their authority to write more lucrative lines unless they stay in the market and keep undercharging policyholders on another money-losing coverage.

I think we should extend that thinking to the oil industry. States should pass laws making gasoline $1 per gallon! Not a penny more! If the oil companies don't like it, too bad! What can they do about it? Stop selling gas in the entire state?

And while we're at it, let's set price ceilings on the drug companies! We shouldn't have to wait for a newly discovered drug to go generic before it can be cheaply sold, right? A dime a pill sounds about right. No more!

Of course, critics warn that taking such a short-sighted stance will only discourage firms from looking for new sources of oil, or from researching life-saving drugs. And they're right.

But when one makes this argument in favor of insurers, the industry is seen as shameless profiteers. The public doesn't understand that if insurance rates are artificially supressed, just like with oil or drugs, investors are discouraged from taking the necessary risks to do business. The market contracts, and consumers are left in the lurch.

Why is it that insurers cannot make this argument convincingly? Why is it that “actuarially sound” rates that actually cover the risks being taken are such dirty words among consumer advocates and regulators?

Is it a fundamental misunderstanding of free-market economics, an abuse of government authority, or both?

I would say a little of both. Most people do not understand how insurance operates. The fact that carriers pay billions in claims doesn't register collectively. Insurers collect money, and never pay anything back. Given that stereotype, rate suppression seems only fair.

Meanwhile, no state lawmaker gets elected by raising insurance rates. If rates are going up, and the government appears impotent to stop insurers from hiking their premiums, the politicians are seen as ineffective. Better to stiff the insurers than the voters, right?

Myopic? Of course. Thus, insurers must continue to press the issue and make their case. People–especially politicians–have very short memories. The industry must remind everyone about the consequences of rate supression if they are to have any hope of retaining anything resembling a free market in insurance.