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 many years.
“The bottom line,” Hunter wrote, “is that insurers are charging consumers too much. Competition, such as it is, has not protected consumers from excessive 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 policymakers.”
For Springfield, Missouri, attorney Steve Garner, the new study sets out the obvious.
“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 remedy.”
The study, Property/Casualty Insurance in 2008, is available at www.consumerfed.org/pdfs/2008Insurance_White_Paper.pdf.