Thursday, April 06, 2006

Insurance Companies: Save Us from Our Profits

Via Library Chronicles, I see that insurance companies made crazy profits last year:
The companies that provide Americans with their homeowners and auto insurance made a record $44.8-billion profit last year even after accounting for the claims of policyholders wiped out by Hurricane Katrina and the other big storms of 2005, according to the firms' filings with state regulators.
The insurance companies call the 18.7% increase “a fluke” and the only way to “fix” this problem of crazy profits is with “substantial premium hikes, a scaling back of commitments by several firms to the most disaster-prone portions of the country and, according to some, a greatly expanded role for the state and federal governments in insuring individuals against the largest of catastrophes.”


More insanity from the article:
Besides boosting profits, the industry raised its surplus by more than 7% to nearly $427 billion, according to an analysis of company filings by the National Assn. of Insurance Commissioners, which represents regulators from the 50 states. The surplus is intended to provide a financial cushion in times of high claims.
So, in a time of the highest claims when they are supposed to rely on their surplus to bail them out, their safety net actually increased:
The industry covered virtually all of its claims and expenses with premiums earned during the year rather than with surplus funds, according to the organization's analysis. The ratio of claims and expenses to premiums was among the lowest in three decades.
But it’s a fluke.

Or, maybe not. You see, the insurers were insured:
The answer, in part, is that U.S. insurers purchased disaster insurance of their own before the 2005 storms, much of it from overseas firms. Executives said that half — and by some estimates, nearly two-thirds — of the insured losses from last year's hurricanes ultimately will be borne by so-called reinsurers, many based in Bermuda and Europe.
And were insulated:
But the industry's remarkable performance also reflects a dozen-year effort by insurers to insulate themselves from the most extreme financial consequences of catastrophe by, among other things, shifting risks previously borne by companies to policyholders and the public.


While premiums for homeowners insurance have increased by more than half since the early 1990s, coverage, especially in disasters, has shrunk.
On top of that, insurers aren’t paying the claims they should be paying:
Despite what he says is evidence of roof damage and leaking, [Allstate subsidiary] Encompass recently denied his claim for $100,000, saying damage was due to flood or settlement and therefore was not covered by his policy.

"My wife and I are both lawyers," said Sebastian. "We've put every bit of our wherewithal into pursing these claims, and we're still not settled after seven months.

"I wonder what happens to the grandmother in Gentilly."
The three-headed monster of success in the insurance world:
1. Pass the loss. Get back the claims you pay by insuring yourself.
2. Charge a lot, cover a little.
3. Don’t pay for the little you do cover.

This process leads to statements like this:
"We've been through some of the worst natural disasters and man-made catastrophes in our history, and had some of the best earnings in the last 20 or 30 years," said Frank W. Nutter, president of the Reinsurance Assn. of America, a Washington trade group.
Don’t mess with success.

Here’s Allstate Chief Executive Edward M. Liddy’s attempt to explain why the insurance companies need to protect themselves from ever losing any money:
"When Hurricane Andrew hit the coast of Florida in 1992," Liddy told a Washington audience in January, "it wiped out all of the profits Allstate ever made in the state from all lines of insurance over the course of our history…. And when four hurricanes hit in 2004, they wiped out all the profits from 1992 to 2004.

"That's not a viable economic proposition for a company," he told his audience. "It's not a viable economic proposition for an industry."
And now, why this is the best article ever written:
But a quick check of Allstate's regulatory filings from the mid-1990s through 2004 showed that the insurer earned $6 billion more in premiums in Florida than it incurred in losses. Add to that the premium earnings for last year, and the total rises to more than $6.6 billion.

Asked about what happened to that sum, Allstate spokesman Mike Trevino responded: "What Mr. Liddy meant to say is that … the four hurricanes wiped out all the profits Allstate earned from our homeowners line of business," not all lines.

Overall, the company made money.
If Liddy isn’t counting that $6 billion, we could sure use it down here to build some levees.

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