The Insurance Industry Exposed
Each February, the Insurance Information Institute (III) gathers Wall Street
analysts and insurance executives to produce its forecast of the property-casualty industry.
For the last 20 years they have been predicting the imminent doom of their storm-and tort-ravaged industry.
Consider 1987. Twenty years ago, III’s state-of-the-industry report showed that insurance company
earnings had improved substantially but not enough to compete with the Fortune 500. To address this
imbalance, III said, the industry needed tort reform
. In particular, it needed a $250,000 cap on
non-economic damages in medical malpractice cases to ameliorate the crisis
. Almost 20 years later,
III was again reporting results that were superb
, robust
, and excellent
, yet still
short of those realized by the Fortune 500
. Again it declared tort costs
a major
external risk
and argued for a $250,000 medical malpractice cap to deal with the crisis
– although inflation has rendered such a cap worth one quarter of what it was when originally proposed.
The financial performance of the property-casualty-insurance industry during 2006 was extraordinary:
in the first nine months alone, profits increased by $15.1 billion.
In 1987, the industry was rebounding from the liability insurance crisis
of the mid-1980’s.
Insurance officials took advantage of national media attention. More recently, insurance officials
have made hay out of a medical liability crisis
and a spate of massive catastrophic events.
The 9/11 terrorist attacks sparked a wave of premium increases across the board, whether or not the
insurance in question had any reasonable connection to terrorism. Even blueberry farmers saw
triple-digit premium increases attributed to so-called terrorism risks. The property-casualty insurance
business is inherently cyclical – a fact that the industry itself does not deny – so it is no surprise
that its clashes with consume advocates have been repeated over and over again. Every setback in profits
has led to aggressive attempts to recoup the industry’s money, either by reducing losses or raising
premiums – but always at the consumers’ expense. Pleading poverty, threatening to withdraw from
markets, cherry-picking customers, and – finally - posting hug profits has been the industry’s pattern
for a quarter of a century.
- Pleading Poverty
In his 2004 state-of-the-industry report, Robert Hartwig, III’s president and chief economist, called that year the
zenith
of profitability and bemoaned the industry’s future, questioning whetherthe decade could be saved
. Hartwig placed much of the blame on the civil justice system, claiming it wasamong the factors that most significantly affect insurer financial performance
. The failure to pass tortreform
– on class actions, asbestos and medical malpractice – was, he said,among the industry’s biggest disappointments in 2004
.The following year brought Hurricane Katrina, along with four other Category 5 storms. The $40 billion in losses attributed to Katrina nearly doubled the losses from the previous most expensive U.S. catastrophe on record, Hurricane Andrew. Hurricanes Wilman and Rita, the third and seventh most expensive hurricanes, respectively, added a further $15 billion in losses. According to III, the storms wiped out every dime of premiums paid and profits earned over 25 years in Louisiana and over 17 years in Mississippi. Yet remarkably, property-casualty insurers made a record profit of $44.2 billion in 2005, a 12 percent increase over the previous year, and more than double the profit of five years earlier. Even in 2005, when 3 of the top 10 most destructive storms in history struck in the same year, insurers made record profits. What’s more, most catastrophic losses associated with Katrina were borne by overseas firms and re-insurers.
Nonetheless, in III’s 2005 state-of-the-industry report, Hartwig again pleaded poverty, noting that
record catastrophe losses in 2004 and 2005 did take their toll on profitability
and thatprofitability in the industry is still low considering the extraordinary risk insurers assume
. Still, Hartwig offered hope that the industry couldspring back
by taking advantage of the Katrina disaster to increase premiums to nearly double previous industry estimates. Spring back it did: profits, pretax operating income, and surplus levels are all smashing records. In 2006, the industry surpassed 2005’s total profits in just the first nine months, earning profits of $44.0 billion. By the end of the year, the industry had seen its best underwriting results since 1949. Insurance behemoths such as Allstate, Progressive and Safeco have found themselves with such an excess of capital that they have started massive stock-buyback programs just to put the money to constructive use. Allstate’s $15 billion buyback program came at the same time that it was sharply reducing or eliminating coverage because it wasfinancially threatened by the risk of future weather catastrophes
. - Fixing the Roof
By the beginning of 2007, insurance industry leaders tried a new tack: saying that profits were good for Wall Street, and what was good for Wall Street was good for America. In response to criticism of industry profit levels, Marc Racicot – formerly a top Enron lobbyist and Republican National Committee chairman, now the head of the American Insurance Association – said,
Insurance is a business based on risk, and any risky business proposition must have a relatively high rate of return for investors from time to time, or the investors will take their capital elsewhere, and that business will cease to exist. Fortunately for all Americans, the property-casualty industry had a much better year financially in 2006 than in 2005 or 2004, when we saw record losses from natural disasters.
There’s nothing wrong with making a profit. It’s as American as a pple pie and it’s essential to our free-market economy. Any widget maker can raise its prices whenever it wishes and do whatever it can to reduce losses. But insurance companies don’t make widgets. Their sole reason for being is to pay their policyholder’s claims – in other words, to incur losses. This sets them apart from other companies in that they bear fiduciary duties to their customers – or policyholders – as well as to their shareholders. And a company’s duty to its policyholders, as dictated by state laws that regulate the industry, is to retain rates that are adequate but not excessive. With their recent statements about profits, industry leaders have essentially confessed to placing profits over policyholders. Meanwhile, policyholders are finding themselves literally left out in the cold.
Mississippi Attorney General Jim Hood sued five insurance companies after Hurricane Katrina hit, alleging that adjusters for the companies tried to trick policyholders into signing forms that acknowledged they sustained flood damage, which is not covered by homeowners insurance, by saying the homeowners needed the forms to receive immediate living expenses. Because most homeowners in the hurricane’s path had policies that covered wind and rain damage, but not flooding, insurance industry officials also began encouraging use of the phrase
the Great New Orleans Flood
to create the impression that flooding in New Orleans was a separate event from the hurricane.Such campaigns are not novel. In 1994, the Northridge earthquake in California killed 57 people, injured 9,000, and caused an estimated $33.8billion in damage. It was the costliest earthquake in U.S. history. After it hit, a State Farm employee testified that company officials forged signatures on earthquake waivers to avoid paying quake-related claims and then withheld evidence when the company was sued. In 1999, a series of powerful tornadoes killed 44 people in Oklahoma and caused $1.8 billing in damages. Homeowners brought a class action against State Farm, alleging that the company had tried to undervalue damage to homes or claim that damage was caused by other factors such as faulty construction. A jury eventually ruled that State Farm had acted
recklessly
andwith malice
and had disregarded its duty to policyholders. The firm that State Farm used to allegedly undervalue damage was Haag Engineering – the same firm accused of mishandling Katrina claims six years later. In 2004, hurricanes Ivan and Frances sparked similar stories of denied claims, with insurance companies attributing hurricane damage in some cases to termites.The bottom line is that insurance companies make money when they don’t pay claims,
said Mary Beth Senkewicz, a former senior executive at the National Association of Insurance Commissioners. - Pulling up Stakes
After an insurer has denied claims, whether by fair means or foul, its next step-according to the industry playbook- is to cancel, or threaten to cancel, policies. In March 2007, just days after the expiration of an emergency rule preventing insurance companies from canceling customers hit by Katrina, Allstate dropped nearly 5,000 customers for allegedly not showing intent to repair their properties. An investigation by the Louisiana Insurance Department found that the cancellations were unjustified. State Insurance Commissioner Jim Donelon said,
At best, it was a very ill-conceived and sloppy inspection program. At worse, they wanted off of those properties.
The last few years have seen a rush of cancellations and dropped policies across the country:
- In Massachusetts, six insurers have stopped selling or renewing policies in the past two years, leaving 45,000 homeowners without coverage.
- In New York, Allstate refused to renew 30,000 policies.
- In Florida, Allstate handed off 120,000 homeowners to a start-up insurer.
- In Texas, Allstate and five other companies canceled a total of 100,000 homeowners policies.
- In Connecticut, the state attorney general subpoenaed insurance companies for threatening to cancel thousands of policies if homeowners did not install storm shutters within 45 days.
- In South Carolina, most insurers have stopped selling coverage along the coast.
In fact, nationwide, over one million homeowners have found themselves looking for new insurance or dealing with a weakened policy. Once again, this strategy is nothing new. After the Oklahoma tornadoes, State Farm stopped writing new homeowners policies. In 1995, State Farm announced plans to cut back on new homeowners policies and raise premiums in northern Texas after a series of storms. Within days of the 9/11 terrorist attacks, executives as Swiss Re, the second largest re-insurer in the world, told White House officials that the company would no longer provide coverage to the property-casualty industry for future terrorism losses. The move was part of a lobbying effort seeking government-funded relief from terrorism risks.
- Profiteering from Catastrophe
Perhaps the most reprehensible insurance industry tactic has been the use of disastrous events to jack up premiums. Taking advantage of catastrophe to raise rates has become so common that industry officials no longer bother to hide it. Hurricane Katrina
is a significant event for our company,
said Jeff Radke, CEO of PXRE, a Bermuda-based re-insurer, during a presentation at one post-hurricane industry conference. He added,our loss will leave us with enough capital to really thrive in the market opportunity that that’s going to follow… Following an event like Katrina, given how bullish we are about that market, this is one of those happy cases where if a rating agency were to insist that we raise capital to maintain our rating, it wouldn’t trouble us much at all.
Examples of industry profiteering in previous times of crisis are rife. The day Hurricane Andrew hit South Florida in 1992, AIG Executive Vice President J.W. Greenberg sent a memo to company presidents throughout the country, saying,We have opportunities from this and everyone must probe with brokers and clients. Begin by calling your underwriters together and explaining the significance of the hurricane. This is an opportunity to get price increases now. We must be the first and it begins by establishing the psychology with our own people. Please get it moving today.
Some insurers also saw the 2001 terrorist attacks as an opportunity to take in more cash, even as industry executives were pushing for a federal cap on liability. Lloyd’s of London described the attacks as an,historic opportunity
to make money, noting that premiumshad shot up to a level where very large profits are possible.
A month after 9/11, Maurice Greenberg, chairman of AIG, told investment analysts that opportunities for his companyhave never been greater.
- Obliging Shareholders
In 1987, III executives were as proud of the industry’s role in the American economy as their present-day counterparts. There was no mention of shareholders. The state-of-the-industry analysis concluded,
Altogether [the industry] provides nearly 2 million jobs and has responsibility for assets which at the end of 1986 totaled more than $1.3 trillion. But its greatest significance in the American economy is as an absorber of personal and business risks.
Twenty years later, profits have trumped policyholders. Consider industry leader Allstate. The insurer has been in the forefront of efforts to maximize profit and minimize losses or claims. Its current president and CEO, Thomas Wilson, recently said Allstate has
begun to think and act more like a consumer products company.
This strategy has enabled Allstate to provide its investors with a return double that of the S&P 500, but only at the expense of policyholders, who have been the victims of cancellations, non-renewals, and punishing loss-prevention techniques. Wilson has made his company’s priorities clear, saying,Our obligation is to earn a return for our shareholders.
The insurance industry has lost sight of its original mission and its responsibility to the public. Now it answers only to Wall Street.