Property-casualty insurers are getting rich by “methodically overcharging consumers,” reducing coverage, underpaying claims and having taxpayers pay some of the tab for risks that carriers should cover, the Consumer Federation of America charged in its latest salvo against the industry.
Using a number of common measures of financial health, the CFA study found that despite the fact “balance sheets for property-casualty insurers are in better condition overall than at any time in history,” with record profits and low losses in recent years, prices remain too high for too many buyers.
The report came under immediate fire from insurer representatives as a repetition of old and “misleading” allegations, with Insurance Information Institute President Robert P. Hartwig calling it “fatally flawed.”
The report said the industry’s “pure” loss ratio—the actual amount of each premium dollar insurers pay back to policyholders in benefits—was only 54.6 cents in 2007.
“Over the past 20 years, the amount paid back as benefits has dramatically declined from over 70 cents per premium dollar, indicating a huge loss in the value of insurance to consumers,” the report added.
“Consumers ultimately pay the price for the unjustified profits, padded reserves and excessive capitalization that exist right now in the insurance industry,” said CFA’s director of insurance, J. Robert Hunter.
He said his analysis indicates that “over the last four years, the typical American family has paid $870 too much” for their p-c insurance coverage.
Mr. Hunter’s study estimates that insurer after-tax profits for 2007 are about $65 billion—just under the record level set in 2006. If insurers release even a small part of their swollen reserves as profits, the total for 2007 will exceed those of 2006, he said.
Total industry profits from 2004 to 2007 are estimated to be $253.1 billion, he added.
Meanwhile, he said the industry’s loss and loss adjustment expense ratio for 2007 is estimated to be 66.7—the second-lowest in the 28 years studied. Five of the seven lowest loss and LAE ratios in the last 28 years have occurred since 2003, according to Mr. Hunter.
He said CFA’s study also estimates that, in 2007, publicly traded insurers will earn a return on equity of over 19 percent—well in excess of what is required by investors, Mr. Hunter contends.
The lower industrywide ROE that insurers report—about 14 percent—underestimates the industry’s actual return, according to Mr. Hunter, who is a former actuary, Texas insurance commissioner and federal insurance administrator.