During 2007, property and casualty insurers continued a trend of charging
too much for premiums and underpaying claims, leading to an overcharge
of about $870 per U.S. household over the last four years, according to
a recent study written by the Consumer Federation of America and released
in conjunction with a variety of consumer organizations.
J. Robert Hunter, the study’s author, is director of insurance for
the Consumer Federation of America and a former Texas insurance commissioner.
Examining data from as early as 1980, Hunter found that excessively high
premiums have resulted in higher profits for the companies-by the end
of 2006, insurers had reaped record profits in three consecutive years-and
lowered the value of insurance.
For instance, Hunter found that in 2007, the nation’s 10 largest
insurers paid out in benefits only about half the money they received
in premiums. That relationship of premium to payout, called the loss ratio,
has declined for all property and casualty insurance over the last 20
years, from a payout of about 67 cents for every premium dollar in 1987
to a low of 53 cents per dollar in 2006.
Hunter determined that the recent record insurance profits occurred during
years in which disasters like the terrorist attacks of 2001 and Hurricane
Katrina in 2005 resulted in huge losses for policyholders. Insurers often
point to such losses as evidence that high premiums and profits are necessary
compensation for the risk they underwrite, Hunter noted.
But “if one owns a property/casualty insurance company stock, one
has, with few exceptions, bought into a low-risk business, lower in risk
than the market in general,” wrote Hunter.
Using data indicating that insurance companies regularly understate their
returns on equity (ROEs), Hunter showed not only that some insurers had
ROEs greater than those of Fortune 500 companies, but that they have minimized
risk at the same time. They have done so by limiting coverage with caps,
deductibles, and policy cancellations and by increasing rates based on
short-term projections that adverse events will be more frequent.
The study also examined the industry’s surplus, the difference between
insurers’ assets and liabilities. Historically, the recommended
ratio of net premiums written to surplus-that is, the risk the insurers
undertake represented by the ratio of the value of premiums paid to insurers’
surplus-has been between 2 to 1 and 1.5 to 1. Anything higher, and the
risk of insurers experiencing a loss is increased. Anything lower, on
the other hand, and the insurer’s surplus is considered to be excessive.
Over the last 20 years, the study found, that ratio has not exceeded 1.5
to 1, and since 1995 it has been at or below 1 to 1. That trend, said
Hunter, is a direct result of insurers charging excessive premiums for
“The bottom line,” Hunter wrote, “is that insurers are
charging consumers too much. Competition, such as it is, has not protected
consumers from excess prices and unfair rating schemes, including the
growing reliance on ‘black-box’ technologies used by insurers
to set rates that are not transparent to the public or accountable to
For Springfield, Missouri, attorney Steve Garner, the new study sets out
“For people involved in suing insurance companies for ignoring the
insureds, it’s been clear for 20 years that the insurance companies
have been abandoning their duties and using their claims units as profit
centers at the expense of their insureds,” he said. Garner is handling
a bad-faith case against Allstate in which the company is being fined
$25,000 a day for refusing to produce the so-called McKinsey documents,
which allegedly show how the company profited at policyholders’ expense.
Still, said Eugene Anderson, a veteran insurance-bad-faith litigator in
New York City, the study “doesn’t even open the door to all
of the corruption that’s involved in insurance, including broker
kickback cases that are still in the courts. Except for one or two states,
the insurance industry controls the state legislatures through lobbying
efforts. At one time, there were about 80 insurance lobbyists in Albany
and only one policyholder lobbyist.”
The study makes clear the importance of pro-consumer state insurance commissioners
and private rights of action, said Jay Angoff, a lawyer in Jefferson City,
Missouri, and a former insurance commissioner in the state.
“Most state insurance commissioners have authority to prohibit unfair
practices prospectively but have no authority to order refunds,”
Angoff said. “So it is essential that consumers themselves have
the right to sue for statutory violations; otherwise, they have no practical
The study, Property/Casualty Insurance in 2008, is available at www.consumerfed.org/pdfs/2008Insurance_White_Paper.pdf.