Insurers Defend Profits; Deny They Overcharge, Under-deliver on Home, Auto Policies

A national consumer organization has charged that property/casualty insurers are unfairly overcharging for home and auto insurance at the same time they are reducing payments to insureds.

According to the Consumer Federation of America, insurer overcharges over the last four years amount to an average of $870 per household.

Insurer profits, reserves and surplus are at or near record levels, according to a new report by the consumer watchdog organization.

“Profits in 2006 rose to unprecedented heights and 2007 may set a fourth consecutive profit record. Unfortunately, a major reason why insurers have reported record-high profits and low losses in recent years is that they have been methodically overcharging consumers, cutting back on coverage, underpaying claims, and getting taxpayers to pick up some of the tab for risks the insurers should cover,” said J. Robert Hunter, the director of insurance for the CFA and author of the study. Hunter, an actuary, former state insurance commissioner, and former federal insurance administrator, is a long-time industry critic.

The insurance industry is disputing the CFA report, charging it is “fatally flawed and grossly distorts the financial position of auto, home and business insurers.”

The industry says the report inflates industry earnings and surplus by including numbers from government programs and double counting dollars in surplus.

The CFA study estimates that retained earnings, or surplus, for the entire industry was $687 billion at the end of 2007, which it describes as “excessive by any legitimate measure.”

The group also calculates that the pure loss ratio, the actual amount of each premium dollar insurers pay to policyholders in benefits, was only 54.6 cents in 2007 and that over the past 20 years, this has declined from over 70 cents per premium dollar, “indicating a huge loss in the value of insurance to consumers.”

As for reserves, it estimates that in 2007 they could be more than $80 billion beyond what is required.

Finally, the CFA says insurer profits are higher than they need to be. It estimates that after-tax returns for 2007 are about $65 billion, just under the record level set in 2006. In 2007, the study estimates that stock insurers will earn a return on equity (ROE) of more than 19 percent, well in excess of what is required by investors. It claims that the lower industry-wide ROE of 7.6 percent that insurers report underestimates the industry’s actual ROE.

The insurers’ Insurance Information Institute and others in the industry took issue with the figures and charges in the CFA report.

According to Robert Hartwig, an economist and president of the III, the CFA study criticizes private auto and home insurers but actually includes data from government run insurers that sell, among other things, workers compensation insurance, thereby artificially inflating its figures for industry retained earnings or policyholder surplus.

Also, Hartwig said, the CFA “compounds this error by double counting tens of billions of dollars in surplus on the books of individual insurers.” This, he said, overstates the industry’s 2007 claims paying capacity by approximately $160 billion.

The CFA estimates that policyholder surplus in 2007 totaled $687 billion when, according to the III, the actual figure is approximately $530 billion—a difference of 30 percent.

But CFA said that even the III has admitted that there is excess capital in the industry today, “estimated by some analysts to be as much as $100 billion…”

The insurer group defended higher insurer profits as important for maintaining strong financial ratings and paying future claims.

“Insurer profitability is necessary in order to maintain high financial strength and credit ratings,” said Hartwig. “An improved capital position will help insurers to pay future large-scale catastrophe losses, which already set three record highs this decade in 2001, 2004 and 2005, and to meet the higher capital requirements imposed on them by ratings agencies in the wake of storms like Hurricane Katrina (which produced $41 billion in insured losses),” said Hartwig.

The Property Casualty Insurers Association of America also defended the industry’s returns.

From 1997 to 2006 insurers earned an average return on equity of 7.6 percent, compared to 13.6 percent for Fortune 500 companies, according to PCI.

“The national numbers demonstrate that through investment gains and sound risk management in states not exposed to the extremes of hurricane losses, the industry is performing well. However, the industry has historically been less profitable than other sectors of the economy,” said Genio Staranczak, PCI’s chief economist.

Staranczak said that historically insurers have made their money on investing premium dollars and not on their underwriting but that this has changed in the past few years.

“In fact, insurers have only made an underwriting profit in two years since 1978. Premium income has been entirely paid out to cover claims and insurers earned profits through interest, dividend and capital gain income on their investment portfolios,” he said.

“In recent years, interest rates have fallen to historically low levels; consequently, insurers have had to improve their underwriting performance to offset declining yields on their bond and money market investments. The charge that insurers are overcharging can not be substantiated by the facts.”

Hartwig challenged the notion that insurers were paying less out to consumers. “Insurers are protecting more cars, homes and businesses than any time in U.S. history and have been an essential component of the country’s economic growth engine for decades,” he said.

Both III and PCI noted that for most consumers, the price of auto and home insurance is not going way up. The November 2007 consumer price index for personal auto insurance was up only about 0.2 percent from last year – much less than the 4.3 percent increase in overall consumer inflation recorded during the same period.

“The price of homeowners insurance today is just 0.4 percent of the median home’s value or less than $900 per year,” said Hartwig.