Speaking Of: Claim Practices (Part One)

After the hard market of the early 2000s, I noticed something unusual. Even multiple hurricanes in 2004 and 2005 could not halt the record profit levels from marching upward. This was quite different from the national hit on profits when Hurricane Andrew struck in 1992 when — despite being in the midst of a strong profit period — profits fell sharply.

So in 2006, I analyzed the nine-month results and began to realize that an astounding record would be made for the full year, in part because of a major risk shift from insurers to policyholders and taxpayers. I documented the excesses in premiums, inadequate claim levels, and noted a steep drop in value of insurance products to consumers as measured by a steep decline in loss ratio over time.

In 2007, I saw the astounding levels of profit continue. Again the levels of premiums were excessive and the claims underpaid and weak value for consumers persisted. But this time, I saw another astounding trend: the surplus of the industry was clearly excessive and reserves were bloated with excess cash, too.

Indeed, over the last four years, the typical American family has paid at least $870 too much for property/casualty insurance. The proof is in the excesses in both the surplus and reserves that P/C insurers hold. The Insurance Information Institute (I.I.I.) says that the industry has "excess capital" of up to $100 billion. Four years ago, the I.I.I. said the capital was "a matter of concern." This does not reflect the huge amounts of capital used by insurers in recent years to buy back their own stocks, buy businesses, or pay higher salaries to management. Nor does the $100 billion in excess surplus take into account the $53 billion in reserves that Insurance Services Office reports as "redundant."

Consider this: It would take more than five Hurricane Katrina-sized losses to eliminate just these unwarranted reserves and surplus. Even if such an unlikely series of losses occurred, the insurance industry would still be extremely safe financially and consumers would still be paying rates that were excessive.

Many have accused you of mischaracterizing the facts about insurance profits. How do you respond?

No one is challenging my basic findings that the P/C insurance industry has set several record profits in a row. The only specific charge I have seen is that I counted the state funds in the surplus. I reported this by simply posting it from A.M. Best's "Aggregates and Averages" and I footnoted it clearly. It is not an error. I did not use it for any calculations pertaining to the key findings on profits anyway, so it does not impact anything else. Thus, it is a classic red herring.

The reason I used the state fund data is that these surpluses are available to pay for catastrophes and I believe it would be an error not to note that. For example, many of the larger state funds are workers' compensation plans and their surpluses are surely available to pay for a terrorism catastrophe, should another attack occur.

Should states increase scrutiny of computer-based claim settlement procedures?

There is significant evidence that some computerized claim systems — such as CSC's Colossus — have been used to systematically generate low-ball offers on claims. If true, that must be ended. It is simply inappropriate for insurers to underpay claims, and it is bad faith.

How to solve this problem is multifaceted. Lawsuits are already at work toward granting remuneration for anyone who was harmed in this way by some of the models. There may need to be more suits. Suits should take care of the damage already done and may include restrictions and prohibitions on future uses of these products. To make sure that we stop all future damage, the state insurance commissioners must dig into these models and get to the bottom of how they are used and regulate both the models (to assure fair offers) and the modelers (as advisory organizations).