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Another Year of Record Profits for Insurers

Overpricing policies, underpaying claims pays off big

January 11, 2008

The study estimates that insurer overcharges over the last four years amount to an average of $870 per household.

The report provides data demonstrating that property/casualty insurance companies are paying out lower claims in relationship to the premiums they charge consumers than at any time in decades.

The pure loss ratio, the actual amount of each premium dollar insurers pay back to policyholders in benefits, was only 54.6 cents in 2007.

Over the past 20 years, the amount paid back as benefits has dramatically declined from over 70 cents per premium dollar, indicating a huge loss in the value of insurance to consumers.

“Consumers ultimately pay the price for the unjustified profits, padded reserves, and excessive capitalization that exist right now in the insurance industry,” said J. Robert Hunter, the Director of Insurance for the Consumer Federation of America (CFA) and author of the study. Hunter is an actuary, former state insurance commissioner, and former federal insurance administrator.

“The insurance industry reaped record profits in 2004 and 2005, despite significant hurricane activity,” said Hunter. “Profits in 2006 rose to unprecedented heights and 2007 may set a fourth consecutive profit record,” he said.

“Unfortunately, a major reason why insurers have reported record-high profits and low losses in recent years is that they have been methodically overcharging consumers, cutting back on coverage, underpaying claims, and getting taxpayers to pick up some of the tab for risks the insurers should cover,” said Hunter.

In the last several years, insurers sharply increased premiums for homeowners and commercial insurance and reduced or eliminated coverage for tens of thousands of Americans in coastal areas. Insurers have succeeded in persuading Congress to continue taxpayer subsidies for terrorism losses and are seeking additional subsidies for catastrophe insurance.

Using a number of common measures of financial health, the study finds that balance sheets for property/casualty insurers are in better condition overall than at any time in history.

The study estimates that after-tax returns for 2007 are about $65 billion, just under the record level set in 2006. If insurers release even a small part of their swollen reserves as profits, final profits for 2007 will exceed those of 2006.

Profits for the record years of 2004, 2005, 2006, and 2007 are estimated to be $253.1 billion. The loss and loss adjustment expense (LAE) ratio for 2007 is estimated to be 66.7 percent, the second lowest in the 28 years studied. Five of the seven lowest loss and LAE ratios in the last 28 years have occurred since 2003.

Consumers have experienced a startling drop in the amount of premium paid in benefits by the insurers, from 72 percent in the late 1980s to only 60 percent today when plotted on a straightline trend over the period.

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