Traditionally risk-takers, property/casualty insurance companies have become more like risk-avoiders when it comes to weather-related claims, leaving consumers and taxpayers to pay much higher costs, according to a new report by a national consumer group.
The report by the Consumer Federation of American (CFA) also charges that the P/C industry is “significantly overcapitalized” and urges state regulators to block insurer rate hikes.
Not only have insurers insulated themselves from their historic share of hurricane risk, they have made “no serious effort to cover risks associated with floods or terrorism, which are entirely backed by federal taxpayers,” says the report titled, “The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk.”
Property/casualty insurers see it quite differently, arguing that they have in fact taken on record amounts of risk and can be expected to continue to do so in the future.
Final numbers are not in yet but by most accounts 2011 will be one of the most expensive years on record for private P/C insurers for U.S. catastrophe losses. Private U.S. insurers’ net losses on underwriting grew to $34.9 billion in nine-months 2011 from $6.3 billion in nine-months 2010. The combined ratio deteriorated to 109.9 percent for nine-months 2011 from 101.2 percent for nine-months 2010, according to ISO and the Property Casualty Insurers Association of America (PCI).
According to the industry groups, the deterioration in underwriting results is largely attributable to a spike in losses and expenses tied to catastrophes. ISO estimates that these costs for catastrophes rose to $33.2 billion in nine-months 2011 from $10.8 billion in nine-months 2010.
Robert Hartwig, an economist and president of the industry’s Insurance Information Institute, said the “so-called study” by CFA shows that the group is “out of touch with reality” and harbors a “bizarre notion” that insurers are not paying enough in catastrophe claims at a time when such losses are near record-highs and projected to grow even more as more people move to coastal and other high risk areas.
Hartwig said catastrophe losses in 2011 contributed about seven full points to the p/c insurance industry’s combined ratio—compared to only about two and one-half points during the 1990s and 2000s.
“It is astonishing that after the end of one of the most catastrophic years in U.S. history, CFA has put out a release like this showing they were the only organization living under a rock,” Hartwig told Insurance Journal.
The CFA claims that insurers today are “significantly” overcapitalized. It says that the appropriate ratio of surplus to premium for an insurer should be $1.50 of surplus to $1 in premium. But, CFA says, insurers now have about double that.
“Insurers’ surplus would have risen by $15 billion in 2011 even with the tornadoes and floods that caused huge losses, if they had not paid stockholder dividends,” Hunter said.
III”s Hartwig said insurers are very well-capitalized today and they need to be.
“Would they prefer that the industry be under-capitalized?” asked Hartwig, noting that “not a single claim went unpaid in 2011 due to an insurer going under,” a situation he contrasted with the banking industry where more than 400 banks have failed.
The CFA report is being released as homeowners insurers in 11 states have requested rate increases of 18 percent or more, according to CFA. These states are Alabama, Arizona, Colorado, Georgia, Kansas, Kentucky, Maine, South Carolina, South Dakota, Tennessee and Virginia.
CFA called upon state regulators to oppose the rate hikes.
“Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on homeowners, many of whom are coping with severe financial difficulties in a bad economy,” said J. Robert Hunter, CFA’s director of insurance and former federal insurance administrator and state insurance commissioner. “In the last 20 years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher homeowners’ rates.”
CFA’s study credits insurers with having achieved some legitimate savings through the use of reinsurance and risk diversification strategies.
However, CFA argues that the bulk of the savings that insurers have realized has been through shifting costs to taxpayers and consumers. CFA said insurers have shifted costs to consumers by increasing deductibles and capping the amounts they will pay if a home is damaged or destroyed. CFA says these reductions expose taxpayers to higher disaster assistance payouts because homeowners have less money available to help themselves.
Hartwig said that “insurers are not responsible for more people moving to high-risk areas” but they are responsible for taking steps such as raising deductibles that assure that they can pay the important claims that do happen.
“Higher deductibles allow insurers to protect against more sever outcomes rather than smaller claims,” said Hartwig.
Hartwig said that even in hurricane-prone areas, consumers have options of which policies and deductibles to buy.
The CFA study presents a hypothetical example of how much the owner of a home worth $100,000 with a typical policy would have paid for losses after Hurricane Katrina in 2005, compared to after Hurricane Andrew in 1992. Assuming that the home had a $500 deductible under Andrew and a 5 percent deductible during Katrina, if $10,000 in damages occurred, the homeowner would have paid $500 to repair the damage after Andrew, but $5,000 after Katrina. If the homeowner had to upgrade the home’s electrical system, the insurance policy would have fully paid for these costs after Andrew, but paid nothing after Katrina. If some water damage occurred at the same time, the policy would have fully covered the wind claim of $9,500 after Andrew, but paid nothing after Katrina, according to CFA.
CFA urges state regulators to stop insurers from “unjustifiably shifting costs and risk to consumers and taxpayers” by examining national data on limited catastrophe losses and excessive surplus before approving any insurer requested rate increases and to ban insurers’ use of anti-concurrent causation clauses and other “fine print” to deny claims.
CFA also urged Congress to reform the National Flood Insurance Program (NFIP) to protect taxpayers and encourage private sector flood insurance. The insurance industry has long supported NFIP reforms that have been stuck in Congress.
CFA also said Congress should limit the exposure of taxpayers under the federal terrorism risk insurance program (TRIA).
“The fact that insurers do not take financial risk for either flood or terrorism insurance is a huge policy error. Taxpayers are required to pick up huge risks that private insurers are more than capable of identifying and backing,” said CFA’s Hunter.
Hartwig said the federal government has not had to pay a penny under the TRIA program.
CFA Hurricane Insurance Disappearing Study-12