ACIC President Responds to Misleading Comments on Market Conditions

November 28, 2002

The following letter to the editor of the San Diego Union-Tribune, authored by Association of California Insurance Companies president Sam Sorich, is regarding insurers’ investment income impact on premiums and rates in California.

Dear Editor:

Dean Calbreath’s Oct. 25 article on insurance market conditions(“Many Stung By Insurance Spike: Soaring Prices, Quick Cancellations Affect Homes, Businesses”) misleads readers by indicating that insurance companies’ investment losses are the driving force behind rising insurance premiums. Investment income is only a minor component in companies’ rate-making formulas, as costs and prospective loss primarily determines rates. Dramatic increases in costs are the main culprit behind the current market conditions.

Auto and homeowners insurance rates are going up because losses are going up. Both the number and severity of claims are escalating in California. Automobile injury claims and collision claims have increased by 14 and 22 percent, respectively, from 1997 to 2001. The average loss on the most commonly purchased homeowners’ policy has risen 62 percent during this time period. Some of the main cost drivers are: high health care costs (California charges 50 percent higher than the nation for in-patient service), high collision repair costs (9th highest in the nation), a spike in vehicle theft rates and traffic death (while nationally these rates are dropping), and nearly $590 million in property damage because of storms in 2000. In addition, increasing median resale prices of homes (higher value of homes leads to higher levels of insurance coverage), rising home repair costs, and surging, frivolous mold claims and litigation (the average cost of a water claim has nearly doubled in the past four years, which comprised about one-third of all claims filed by California homeowners in 2001) have all made an impact.

Indeed, the nation’s economic slump has affected all businesses, including the insurance industry. But to blame investment losses for California’s insurance woes is inaccurate.

For rates to stabilize or decline, costs must be contained or decreased. However, the insurance industry alone cannot influence these costs. Lawmakers, insurance companies, community leaders and residents must make a concerted effort toward reducing the underlying costs that are making insurance prices a concern for Californians.

When the Legislature reconvenes in Sacramento next month, insurance issues are sure to be a top priority. It is important that legislators understand the facts about insurers’ investment income before taking any action in their deliberations.

Samuel Sorich
President, Association of California Insurance Companies

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