Insurance Industry’s Enron, WorldCom Losses Lead to Rate Hikes; 10 Insurers Lost $274 Million on Big 5 Corporate Frauds

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Property and Casualty Insurers Invested Too Heavily in Markets During Late 1990s

Santa Monica– Large liability insurance companies are demanding rate increases to offset massive investment losses, according to a new analysis of major insurance companies by the nonprofit Foundation for Taxpayer and Consumer Rights (FTCR). The insurance industry contends that consumer rate hikes are due to an explosion in the cost of paying claims, but, according to FTCR, the real reason for the rate hikes is to pay off losses associated with the companies’ failed investments.

Read the report: Risky Business: Insurers’ Increasingly Risky Investments in Corporate America Cause Insurance Premiums to Skyrocket .

"Insurance rates are increasing because insurance companies bet on Enron and WorldCom and they lost. Rather than taking responsibility for investment mistakes, insurers are forcing policyholders to make up the difference," said Harvey Rosenfield, president of FTCR

According to the data:

  • 10 companies reviewed lost $274 million on investments in the Big 5 Frauds: Enron, WorldCom, Adelphia, Global Crossing and Tyco
  • State Farm Mutual Auto increased its level of corporate investment by 32% since 1994. The company lost $60.7 million on WorldCom investments this year, and $13.5 million on Enron last year.
  • Allstate lost $23.3 million in the first half of 2002 as the company shed its Tyco shares.
  • Last year, Fireman’s Fund lost $40 million on WorldCom this year and $85.4 million in Winstar stocks and bonds after that company filed for bankruptcy last year.
  • USAA had 57% of its portfolio in the stock market alone; it lost over $63 million in international energy and telecom investments through its own emerging markets fund.
  • By 2001, the reviewed insurance companies had, on average, 57% of their investments tied up in corporate stocks and bonds.

According to Dr. John W. Wilson, a Washington, D.C.-based economic consultant and insurance industry expert, "Insurers throughout the nation not only had less investment income in 2001, they also took a shellacking on the market value of their stock portfolios, which dropped by nearly $20 billion." Wilson argues that regulators must hold insurers accountable for these losses: "Insurance commissioners should look very closely before authorizing rate increases that aren’t really justified and have little to do with actual loss payment requirements."

Insurance Companies Increasingly Play the Markets

During the stock market bubble, the analysis shows, large insurance companies dramatically increased their level of investment in corporations. FTCR compared insurers’ investments in corporate stocks and bonds with overall investment portfolios, the remainder of which is largely invested in municipal bonds or similar public financing instruments.

Policyholders Should Be Protected From Insurers’ Risky Behavior

Insurance commissioners should immediately review the impact of the change in investing habits by insurers and stop all rate hikes that are attributable to insurers’ portfolio mismanagement, FTCR said.

"Insurance companies are blaming consumers for the companies’ financial problems, by saying that the rate hikes are due to claim costs when, in reality, it is a combination of greed and foolishness that got the insurers into trouble," said Douglas Heller, senior consumer advocate for FTCR. "This is like double jeopardy for a lot of policyholders. They lost money in their retirement accounts and now the insurance industry is imposing its losses on policyholders. Insurers ought to have invested more wisely, and the companies, not policyholders, should be punished for this recklessness."

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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