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California Charges Auto, Homeowner Insurers Making Excess Profits

May 25, 2006

• 2008 Another Year of Record Profits for Insurers • Insurers Profits Up in 2007 • California Charges Auto, Homeowner Insurers Making Excess Profits --- • More about insurance ...

California Insurance Commissioner John Garamendi charges homeowner and auto insurers have been enjoying burgeoning profits, thanks to lower pay-outs and high premiums. Garamendi said he will hold a hearing on the issue July 20.

"For the past two years homeowners and automobile insurance companies in this state have profited immensely at the expense of consumers," Garamendi said. "The more money these companies keep from your premiums, the less they pay out in claims. In my view, Californians are due for a break."

Garamendi has already clashed with auto insurers, through a new pricing policy that requires insurers to base their premiums on a driver's safety record rather than on his or her place of residence.

"The industry recently unleashed a $2.4 million advertising campaign attacking me and these reforms. The shady methods they employed in a failed attempt to intimidate me into delaying the reforms demonstrate the lengths to which they will go to protect this extraordinarily profitable market they currently enjoy," Garamendi said.

In a report released today, Garamendi focused on "loss ratio," which measures what an insurer spends to pay the claims of its customers, expressed as a percentage of its premiums.

If a company collects $100 in premiums and spends $40 of these premiums on customer claims, the company has a 40% loss ratio. Lower loss ratios thus translate to higher profits.

Garamendi charged that, beginning in 2004, loss ratios dropped markedly in the homeowners' insurance market in California. Only four companies reported loss ratios exceeding 50% in 2004, and only five companies were in this category by the end of 2005.

"In 2004, when we began to see such significant drops in loss ratios, I directed my staff to continue to monitor the trend for one more year to determine whether these results were merely an aberration. We have recently completed our review of 2005 data and confirmed the trend continues. In fact some low loss ratios have declined even further," he said.

"The data we have collected shows that while companies eagerly filed applications to increase rates during periods of higher losses, there was no corresponding race to reduce rates as loss ratios tumbled," Garamendi said.

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