OLDWICK, N.J. (BestWire) – Faced with steep increases in premium rates across personal and commercial lines, a newly formed coalition of consumer and public interest groups is urging state regulators to rein in insurers from raising rates.
The Americans for Insurance Reform argues that regulators should not only stop insurers from raising rates now, but they should have taken more action in the soft market to prevent the insurance rates from dropping too low.
“It’s the third cycle I’ve been in, and I’m getting tired of it,” said J. Robert Hunter, one of the founders of the group and director of insurance for the Consumer Federation of America. “The insurance cycle is evidence of a breakdown in the state regulatory system. Regulators need to keep rates from being both excessive and inadequate.”
The group said auto rates rose by 7.3% in 2001 and appear headed for a slightly higher increase in 2002, following an average increase of just 0.7% for the preceding three years. Homeowners and medical malpractice insurance also are experiencing drastic rate increases, Hunter said. For instance, he said homeowners rates are rising by 25% in some states, and 40% in Virginia.
The Americans for Insurance Reform, which includes 60 consumer groups, including the Texas-based Center for Economic Justice and the California-based Foundation for Taxpayer and Consumer Rights, has sent letters to all state insurance regulators outlining what action they should be taking to end insurance industry “price-gouging.”
“We are appalled that insurers–whose own actions have created a crisis in insurance affordability and availability for everyone from doctors to trauma centers to homeowners and motorists–are blaming others for their own mismanagement,” the group said in its letters to regulators.
While insurers blame the current hard market on rising costs, excessive regulation, falling investment income, the terrorist attacks and rising jury awards, the consumer group argues that insurers failed to keep rates adequate in the soft market. As an example, the group estimates that when dollars are adjusted for inflation, the average medical-malpractice premium in 1991 was $11,614 a year, compared with $7,844 in 2000. That means insurers would have to raise medical-malpractice rates by 48% just to return to 1991 levels.
“The issue was the insurer’s lack of action due to high market returns on the float of the medical-malpractice premium dollar, not lawsuits,” the group said in its letter. The group suggests that commissioners take several steps, including freezing medical-malpractice and homeowners rates immediately; investigating the profitability of the insurance industry in the 1990s; and examining whether insurers are trying to recoup money lost in the stock market by raising rates now. The group suggests that if regulators do not take action, U.S. consumers will experience dramatic insurance price fluctuations every 10 to 15 years.
Insurance trade groups said competition in the marketplace is the best way for consumers to have the lowest rates, and they noted that companies must increase prices when costs are rising to remain solvent.
The consumer group mistakenly “views the industry as a public utility, which is usually regulated by a commission that literally sets the rates,” said Rey Becker, vice president of property/casualty department for the Alliance of American Insurers. “In the insurance industry, you have hundreds of companies out there writing a variety of products with a variety of price options. We don’t need regulators to do more than they do right now, which is regulate the solvency of the industry.”
During the soft market, the group “should have put out a press release saying insurance costs too little,” Becker said, noting that consumers didn’t complain then that prices were low. “This is a damned if you do, damned if you don’t situation. If you try to hold the line for your customers (and costs go up), you’ll have a market where you’ll have to raise the rates,” Becker said. “They can’t have it both ways.” And while many companies are raising rates or stopping writing new homeowners business–including State Farm Group, the nation’s largest auto and homeowners writer–the market isn’t in crisis, Becker said. “There are still plenty of insurers writing homeowners insurance, you just have to shop around. In some cases, it will cost more,” he said.
Illinois–long hailed by the industry as a state with business-friendly regulation–doesn’t regulate insurers’ rates at all, said Director of Insurance Nat Shapo. “I appreciate the concern of the insurance groups. This is a tough market. But our view in Illinois remains that the best environment for consumers in the long run is a market-based competition being used to regulate rates,” Shapo said. “Even in the current market, consumers can choose between companies raising rates and companies that aren’t.”
Also, he said, linking politics to rates will result in the focus being on keeping rates low, rather than ensuring they are adequate. “Consumers naturally react to rates that are higher, because it provides an immediate and tangible jolt to them. But if and when rates are too low, as opposed to too high, a rate-regulated environment would not receive the type of political pressure it would if rates were perceived too high,” Shapo said.