Industry Report Shows Seeds of Future Insurance Crisis
Santa Monica, CA — The insurance industry’s 2004 profits shattered results of the past three decades, according to insurance company data being released today in a special report by A.M. Best. The new data indicate that the exorbitant premiums faced by individual and business policyholders in recent years were charged to fatten profits not cover claims, said the nonprofit Foundation for Taxpayer and Consumer Rights (FTCR).
A.M. Best explains the extraordinary profit as the result of “strong pricing and restrictive policy terms and conditions over the past two years.” In other words, profits were driven by skyrocketing premiums and dramatically reduced policy benefits and coverage, said FTCR.
Property and casualty insurers netted $40.5 billion in profits and increased the industry surplus to more than $400 billion in 2004, the data show. The profit data point to excessive rates throughout the industry and expose the need for tougher regulation of insurance companies, according to consumer advocates with the FTCR.
“This data prove that insurers are charging more and more for fewer and fewer benefits,” said FTCR’s Executive Director Douglas Heller. “The data warrant an investigation by every insurance commissioner in the nation into why insurers are claiming the need for special limits on consumers legal rights when they are price gouging the American public.”
The statistics show that, for the first time since 1978, insurers profited from their policy sales (known as underwriting) even before accounting for $41 billion in investment earnings. Because insurers are allowed to invest policyholders’ premiums and reap the returns, insurers make their profit from these investment returns and not from underwriting, as had been the case every year since 1978. In 2004, the industry had approximately $800 billion in policyholder premiums and surplus with which to invest.
California’s Proposition 103 Provides Model for Reform
FTCR points to California’s voter-approved Proposition 103 of 1988 as a model for the insurance reform needed to rein in insurers and reduce premiums paid by policyholders. The law, comprising the strongest regulatory system in the nation, mandates that insurers justify proposed rate hikes and demonstrate that any increase is needed and not excessive. No rate change can take effect without the approval of the insurance commissioner. Proposition 103 also allows members of the public to challenge proposed hikes before they take affect. FTCR, using Proposition 103, has blocked over $330 million in proposed insurance rate hikes in California since 2003.
“Because insurance company rates are deregulated or poorly regulated in most states, insurers were allowed to overprice insurance policies to such a degree that they broke a nearly three decade old profit record,” said Heller. “With insurers drawn to the possibility of squeezing even more money out of policyholders in 2005, lawmakers and regulators need to reform this industry by implementing California-style regulation and consumer protections.”
Report Foreshadows Future “Insurance Crisis”
For decades it has been known that insurance industry pricing follows an “insurance cycle,” which is tethered to the broader national and global economy. When the economy stagnates or collapses and insurers’ investment income declines — as it did in the first years of this decade — the industry declares an “insurance crisis” and, according to FTCR, takes the following steps:
– forces prices higher;
– reduces coverage provided by policies;
– limits the availability of policies;
– and calls for legislation limiting individuals’ rights to file lawsuits.
When the economy strengthens and investment returns rebound, insurance companies begin to temper and then reduce premiums while investing premium and surplus more aggressively. This leads to riskier behavior by insurers, inevitably setting the industry up to declare another crisis when the economy softens.
FTCR noted that the last time the insurance industry netted underwriting profits, in 1978, the nation had just emerged from the historic “insurance crisis” of the mid-1970s. That “crisis” led to massive rate hikes and severe legal restrictions across the states, including California’s infamous law limiting the legal rights of medical malpractice victims known as MICRA.
Now, insurance companies are beginning to seal their fate once again as, according to A.M. Best, “many insurers have shifted funds held as cash and in short-term investment vehicles into stocks and bonds.” The infusion of stock and corporate bond investments into insurers’ portfolios in the late 1990s led to a precipitous weakening of profits in the wake of Enron, WorldCom and the other corporate scandals in 2001 and 2002.
Consumer groups argue that insurance companies’ premiums and business practices should be far more regulated, as they are in California, in order to protect individual consumers and businesses from the turbulence of the insurance cycle.
Click here for more information about Proposition 103 and reforming the insurance industry.
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The Foundation for Taxpayer and Consumer Rights is a nonprofit, nonpartisan organization.