A controversial study released by a consumer group accusing the industry of shifting from risk takers to risk-avoiders has sparked a robust defence by insurance industry groups.
In February, the Consumer Federation of America (CFA) released a study that claimed insurance companies have “significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornadoes and floods in recent years”, shifting much of the risk and costs for these events to consumers and taxpayers. The federation noted that insurers in 11 states are requesting homeowners’ rate increases of 18% or more.
“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 Robert Hunter, CFA’s director of insurance, a former federal insurance administrator and state insurance commissioner, and a longtime criticiser of the industry.
“In the last 20 years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalised and cannot justify higher homeowners’ rates.”
According to the study, the bulk of the savings that insurers have realised has been through shifting costs to taxpayers and consumers. “Insurers have hollowed out the coverage they offer to homeowners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed,” the CFA said in a release.
The federation added: “Insurers have also used fine print tricks, such as the ‘anticoncurrent causation clause,’ which allows insurers to refuse to pay for wind losses if any flood damage occurs at about the same time, even if the wind losses occurred first. Finally, insurers have shifted coverage for homes in high-risk areas to state insurance pools.”
The study concludes that the insurance industry has moved from its historic role as a calculated risk-taker to one of a risk avoider, exposing consumers and taxpayers to much higher costs. “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,” the CFA said.
Understandably, given the hefty losses insurers have taken from natural catastrophes in the past decade, industry trade groups have not taken the accusations lying down.
The New York-based Insurance Information Institute challenged the assertions made in the report by citing US historical data involving insurance and natural catastrophes.
Robert Hartwig, president of the III, pointed out that US property/casualty insurers cumulatively paid $408bn in catastrophe-related claims to their motor, homeowners and business policyholders between 1990 and 2011.
The III said US insurers’ claims payouts from natural catastrophes grew seven-fold as a share of total claims payouts between 1960 and 2010. The trend has accelerated over the past two decades, with hurricanes and tropical storms accounting for 44% of nat cat claims payouts dating back to the early 1990s, and tornadoes generating 30% of the payouts. Last year, tornadoes, severe winter weather and Hurricane Irene reduced the US property/casualty insurers’ cumulative policyholders’ surplus to $538.6bn as of September 30 2011, 3.3% lower than the $556.9bn policyholders’ surplus at year-end 2010.
The CFA countered that the $18bn drop in surplus was not because of losses in insurance operations – which produced net income of $8bn – but because of $16.9bn in dividends that insurers paid to stockholders and capital losses of $13.1bn. The CFA said the property/casualty industry’s surplus grew to $580bn in 2010 from $159bn in 1991.
“During that time, the key measure used to assess industry financial solidity – the premium-to-surplus ratio – fell from 1.40 to 0.73. (Most experts estimate that the ratio of premiums to surplus that is safe is 1.5.) This means that, despite the increase in catastrophe damages, industry financial risk declined by half. This has led many industry observers to ask if the property/casualty insurers are excessively capitalised,” said the CFA, adding that the III said the industry excess capital was $81.9bn at the end of 2010.
In responding to the study, the III also said: “P/C insurers are in the risk management business. As such, insurers have, with the approval of state lawmakers and regulators, instituted hurricane deductibles in recent years to allow them to write policies in the most hurricane prone parts of the US.
This has made private-sector coverage more available and affordable in coastal areas than would otherwise be the case.”
The CFA urged states to roll back what it termed “these anti-consumer changes”.
Not done there, the federation recommended a number of changes to the National Flood Insurance Program (NFIP). It demanded a study on how the private sector could start covering flood losses, perhaps by requiring insurers pick up a small, but increasingly larger, percentage of flood risk.
The Reinsurance Association of America (RAA) also waded into the argument.
Frank Nutter, president of the RAA, countered that reinsurers actively seek to assume catastrophe risk and have historically played a major role in financing catastrophe risk throughout the world.
The RAA also pointed out reinsurers endorse reform of the NFIP. “On a number of levels, there is a strong case to be made for privatising the NFIP. Private reinsurers and capital markets have the capacity and interest in underwriting flood insurance risks, and that has real upside for American taxpayers who bear the costs of the current programme,” said Nutter.