In March, Claims Magazine gave J. Robert Hunter from the Consumer Federation of America (CFA) the chance to explain some of the negative observations he made about the property/casualty industry in a 37-page report called Property/Casualty Insurance in 2008: Overpriced Insurance and Underpaid Claims Result in Unjustified Profits, Padded Reserves, and Excessive Capitalization, a report that was published earlier this year.
In the interest of balance and fairness, Claims' Eric Gilkey spoke with the insurance industry's biggest proponent, the president of Insurance Information Institute's Robert Hartwig, to get his rebuttal and address concerns about the report's accuracy.
You said that the Consumer Federation of America's study is "fatally flawed and grossly distorts the financial position of auto, home and business insurers." How so?
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 surpluses. More serious is the fact that the CFA compounds this error by double counting billions of dollars in surplus on the books of individual insurers. Consequently, it overstates the industry's 2007 claim-paying capacity by approximately $160 billion. Specifically, the CFA estimates that policyholder surpluses in 2007 totaled $687 billion, when the actual figure is approximately $530 billion — a difference of 30 percent.
Insurers are protecting more cars, homes, and businesses than at any time in U.S. history and have been an essential component of the country's economic growth engine for decades. 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 claim payouts continue to drop is absurd.
You say that insurers must demonstrate an ability to pay claims arising from more than one major catastrophe per year in order to maintain and improve financial strength ratings. Is the industry taking this idea too far?
An improved capital position will help insurers to pay future large-scale catastrophe losses, which already set three record highs this decade (in 2001, 2004, and 2005), and to meet the higher capital requirements imposed on them by rating agencies in the wake of storms like Hurricane Katrina, which produced $41 billion in insured losses. The operating scenario for insurers today is that they could face a year with a $100 billion catastrophe in the very near future. Maintaining a strong capital position becomes that much more important in uncertain economic times when industry earnings from investments could flatten out or diminish.
Should state DOIs begin scrutinizing computer-based claim settlement procedures found in software widely available in the open market, due to concerns over manipulation?
Insurers today and the firms whom they contract with are compliant with regulator requests for information regarding the operation of computer-based settlement procedures. Such procedures help to expedite claim settlements and the payment process for all policyholders.
Anything else you would like to comment on in the CFA's report?
The CFA is fond of including the industry's profits from all lines and all states and then citing the price of insurance in places like Florida as evidence that prices are too high. The CFA would do well to learn — once and for all — that each type of insurance in each state must stand on its own. Profits earned in other states and other lines cannot be used to subsidize other states or other lines of coverage. More generally, a strong, stable, sound, and financially secure insurance industry is in the best interest of not just insurers, but also policyholders and regulators.
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