Are insurers reeling from disaster or reeling in the profits?
October 17th, 2006
by Eugene R. Anderson & William G. Passannante
Eugene R. Anderson is founding partner and William G. Passannante is co-chair of the insurance recovery practice of Anderson Kill & Olick, P.C., a national law firm headquartered in New York City.
NEW YORK (MarketWatch) — In the wake of last year's devastating hurricanes, no one can accuse the insurance industry of message indiscipline.
According to media reports, the industry is "reeling from an estimated $56 billion of hurricane-related losses" (Wall Street Journal); "still reeling from the aftermath of 2005's record setting storms" (Best's Review); "reeling from the scale of the disaster (Washington Post), etc., etc.
Yet in calm sessions of sweet silent thought, insurance executives might agree with Shakespeare: "Sweet are the uses of adversity, which like the toad, ugly and venomous, wears yet a precious jewel in his head." From the venomous head of the hurricanes, the insurance industry has reaped the "precious jewel" of outsized profits.
The Insurance Information Institute (III) reports that property-casualty insurance carriers in 2005 earned a record $48.8 billion and increased their surplus to over $427 billion. Industry experts are forecasting a $60 billion industry profit in 2006, and the III boasts that current underwriting performance — the profit derived from premiums minus claims payouts, excluding investment income — is "the best in a generation (or two)." See Industry Financials and Outlook here. If anyone's reeling, it's policyholders.
Following every major disaster or scandal, a simple formula protects insurance industry profits: raise rates, reduce coverage and deny claims.
Raise rates
In Florida, homeowners are up in arms as homeowners' insurance providers obtain approvals for rate increases generally in excess of 50%. Rates are rising nationwide in any area that might potentially be hit by a storm — if insurance is available at all. As far north as Massachusetts, homeowners have seen increases of up to 75%. In New York, Allstate reportedly will pull out of eight costal counties and raise rates 8.5% on the remaining policyholders. The American insurance Association justifies increases on account of "horrific" forecasts for upcoming storm seasons — based on dubious new risk modeling formulae that J. Robert Hunter of the Consumer Federation of America has called "collusive."
Reduce coverage
According to the III, while insurance companies have historically absorbed over 60% of post-disaster losses, the percentage shrank to less than 50% after the 2004 Florida hurricanes and to about 30% after Katrina (though it will be for the courts decide whether the post-Katrina calculation stands). Over the past ten years, the insurance industry has sought relentlessly to reduce the scope of homeowners' coverage — through mold exclusions, ever-more expansive "anti-concurrent causation" clauses, new special deductibles for windstorm damage, and new caps on what used to be called "replacement value."
Deny claims
As reported by the AP, Cori and Kerri Rigsby, two sisters who had long performed claims work for State Farm on a contract basis, have provided homeowners' attorneys and regulators with 15,000 pages of evidence suggesting that while processing Katrina claims, State Farm had its claims managers memorize language to avoid acknowledging wind damage when water contributed to the loss. Further, these brave whistleblowers allege that when State Farm disliked the results of an engineer's report, the company regularly substituted a second "cookie-cutter" report concluding that the bulk of damage was caused by rising water (as opposed to wind) and therefore excluded. The Rigsby sisters state simply:, "We believe State Farm has committed fraud, and we have turned it over to be investigated."
The insurance industry's response to last year's hurricanes follows a tried-and-true script. After every disaster or scandal, the industry asserts a 'crisis', which is then invoked to justify a new round of premium increases and policy exclusions. When September 11 claims hit, the insurance industry "reeled." Terrorism exclusions and the TRIA "backstop" followed. Insurance companies survived and thrived. When the product liability "crisis" hit, insurance companies "reeled" — then recovered to write specific product liability "laser" exclusions. The industry survived and thrived. When asbestos suits emerged, the stricken industry wrote asbestos exclusions — and survived and thrived. When environmental suits and Superfund had their heyday, the "reeling" industry wrote pollution exclusions — then survived and thrived. Each of these "crises" led to narrowing coverage terms and justified higher premiums.
Insurance has been called the quadruple "D" business: Death, Disease, Disaster and Destruction. The industry needs the four "D's" to create a demand for its product. And the Katrina and Rita calamities show the how much the rest of us need for the industry to deliver honest, real-life, risk-transfer insurance. Instead, policyholders receive miserly claims service, increasing premiums and narrowing coverage.
Some portion of the "precious jewel" so jealously guarded by insurance companies should be delivered to premium-paying customers in the form of full and complete payment when they submit covered claims. Somehow, we think it will always be necessary to pry the "jewel" loose.
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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