Putting profits over policyholders

Insurance companies regularly plead poverty, saying civil justice is costing them untold grief—and money. Behind those crocodile tears, they’re doing everything they can to avoid paying legitimate claims, while their profits soar to record heights.

David Ratcliff

Each February, the Insurance Information Institute (III) gathers Wall Street analysts and insurance executives to produce its forecast of the property-casualty industry. But unlike February’s more famous prognosticator, Punxsutawney Phil, the gathered experts are almost certain to see their shadows, because for the last 20 years they have been predicting the imminent doom of their storm- and tort-ravaged industry. In fact, the industry’s annual hand-wringing resembles the endlessly repeating day Bill Murray suffered in the movie Groundhog Day.

Consider 1987. Twenty years ago, III’s state-of-the-industry report showed that insurance company earnings had improved substantially but not enough to compete with the Fortune 500. To address this imbalance, III said, the industry needed tort “reform.” In particular, it needed a $250,000 cap on noneconomic damages in medical malpractice cases to ameliorate the “crisis.”¹

Almost 20 years later, III was again reporting results that were “superb,” “robust,” and “excellent,” yet still “short of those realized by the Fortune 500.” Again it declared “tort costs” a “major external risk” and argued for a $250,000 medical malpractice cap to deal with the “crisis”—although inflation has rendered such a cap worth one quarter of what it was when originally proposed.²

The financial performance of the property-casualty insurance industry during 2006 was extraordinary: In the first nine months alone, profits increased by $15.1 billion.³

In 1987, the industry was rebounding from the “liability insurance crisis” of the mid-1980s. Insurance officials took advantage of national media attention, such as Time magazine’s 1986 cover story, “Sorry, Your Policy Is Cancelled.”⁴More recently, insurance officials have made hay out of a “medical liability crisis” and a spate of massive catastrophic events. The 9/11 terrorist attacks sparked a wave of premium increases across the board, whether or not the insurance in question had any reasonable connection to terrorism. Even blueberry farmers saw triple-digit premium increases attributed to so-called terrorism risks.⁵

The property-casualty insurance business is inherently cyclical—a fact that the industry itself does not deny⁶—so it is no surprise that its clashes with consumer advocates have been repeated over and over again. Every setback in profits has led to aggressive attempts to recoup the industry’s money, either by reducing losses or raising premiums—but always at the consumers’ expense. Pleading poverty, threatening to withdraw from markets, cherry-picking customers, and—finally—posting huge profits has been the industry’s pattern for a quarter of a century.

Pleading poverty

In his 2004 state-of-the-industry report, Robert Hartwig, III’s president and chief economist, called that year the “zenith” of profitability and bemoaned the industry’s future, questioning whether “the decade could be saved.”⁷ Hartwig placed much of the blame on the civil justice system, claiming it was “among the factors that most significantly affect insurer financial performance.”⁸The failure to pass tort “reform”—on class actions, asbestos, and medical malpractice—was, he said, “among the industry’s biggest disappointments in 2004.”⁹

The following year brought Hurricane Katrina, along with four other Category 5 storms. The $40 billion in losses attributed to Katrina nearly doubled the losses from the previous most expensive U.S. catastrophe on record, 1992’s Hurricane Andrew. Hurricanes Wilma and Rita, the third and seventh most expensive hurricanes, respectively, added a further $15 billion in losses.¹⁰ According to III, the storms wiped out every dime of premiums paid and profits earned over 25 years in Louisiana and over 17 years in Mississippi.¹¹

Yet remarkably, property-casualty insurers made a record profit of $44.2 billion in 2005, a 12 percent increase over the previous year and more than double the profit of five years earlier.

Nonetheless, in III’s 2005 state-of-the-industry report, Hartwig again pleaded poverty, noting that “record catastrophe losses in 2004 and 2005 did take their toll on profitability” and that “profitability in the industry is still low considering the extraordinary risk insurers assume.”¹² Still, Hartwig offered hope that the industry could “spring back” by taking advantage of the Katrina disaster to increase premiums to nearly double previous industry estimates.¹³

Spring back it did: Profits, pretax operating income, and surplus levels are all smashing records. In 2006, the industry surpassed 2005’s total profits in just the first nine months, earning profits of $44.9 billion.¹⁴ By the end of the year, the industry had seen its best underwriting results since 1949.¹⁵

Insurance behemoths such as Allstate, Progressive, and Safeco have found themselves with such an excess of capital that they have started massive stock-buyback programs just to put the money to constructive use. Allstate’s $15 billion buyback program came at the same time that it was sharply reducing or eliminating coverage because it was “financially threatened by the risk of future weather catastrophes.”¹⁶

When defending such results, insurance industry representatives point to the risks insurers take. As Hartwig said in his industry forecast, “Considering the tremendous risk assumed by investors who back major insurance and reinsurance companies, the returns in most years are woefully inadequate.”¹⁷

This is nothing but more industry spin. Twenty years ago, Hartwig’s predecessors at III were complaining that “the highly competitive nature of the property-casualty insurance business generally has held its profitability below the average of all U.S. industries.”¹⁸ Yet by all financial measures, investing in property-casualty insurance stock has proven a low-risk proposition.¹⁹Even in 2005, when 3 of the top 10 most destructive storms in history struck in the same year, insurers made record profits. What’s more, most catastrophic losses associated with Katrina were borne by overseas firms and reinsurers.²⁰

Fixing the roof

Pleading poverty amid such wealth has become increasingly untenable. Hartwig sounded almost embarrassed in his year-end update on industry financials, saying that although profits were going to set a record high in 2006, they still would not be as high as those of other industries.²¹

By the beginning of 2007, insurance industry leaders tried a new tack: saying that profits were good for Wall Street, and what was good for Wall Street was good for America. In response to criticism of industry profit levels, Marc Racicot—formerly a top Enron lobbyist and Republican National Committee chairman, now the head of the American Insurance Association—said,

Insurance is a business based on risk, and any risky business proposition must have a relatively high rate of return for investors from time to time, or the investors will take their capital elsewhere, and that business will cease to exist. Fortunately for all Americans, the property-casualty industry had a much better year financially in 2006 than in 2005 or 2004, when we saw record losses from natural disasters.²²

A few days later, Hartwig echoed those comments, saying that profits gave insurers a chance to “fix the roof while the sun was shining.”²³ On one hand, the comments were a natural progression from previous claims that a burgeoning industry was good for the economy. But on the other hand, these statements can be seen as an open admission—and defense of—profiteering.

There is nothing wrong with making a profit. It’s as American as apple pie and it’s essential to our free-market economy. Any widget maker can raise its prices whenever it wishes and do whatever it can to reduce losses.

But insurance companies don’t make widgets. Their sole reason for being is to pay their policyholders’ claims—in other words, to incur losses. This sets them apart from other companies in that they bear fiduciary duties to their customers—or policyholders—as well as their shareholders. And a company’s duty to its policyholders, as dictated by state laws that regulate the industry, is to retain rates that are adequate but not excessive. With their recent statements about profits, industry leaders have essentially confessed to placing profits over policyholders.

Meanwhile, policyholders are finding themselves literally left out in the cold.

Mississippi Attorney General Jim Hood sued five insurance companies after Hurricane Katrina hit, alleging that adjusters for the companies tried to trick policyholders into signing forms that acknowledged they sustained flood damage, which is not covered by homeowners insurance, by saying the homeowners needed the forms to receive immediate living expenses.²⁴ Because most homeowners in the hurricane’s path had policies that covered wind and rain damage but not flooding, insurance industry officials also began encouraging use of the phrase “the Great New Orleans Flood” to create the impression that flooding in New Orleans was a separate event from the hurricane.²⁵

Such campaigns are not novel. In 1994, the Northridge earthquake in California killed 57 people, injured 9,000, and caused an estimated $33.8 billion in damage. It was the costliest earthquake in U.S. history. After it hit, a State Farm employee testified that company officials forged signatures on earthquake waivers to avoid paying quake-related claims and then withheld evidence when the company was sued.²⁶

In 1999, a series of powerful tornadoes killed 44 people in Oklahoma and caused $1.8 billion in damages. Homeowners brought a class action against State Farm, alleging that the company had tried to undervalue damage to homes or claim that damage was caused by other factors such as faulty construction. A jury eventually ruled that State Farm had acted “recklessly” and “with malice” and had disregarded its duty to policyholders.²⁷ The firm that State Farm used to allegedly undervalue damage was Haag Engineering—the same firm accused of mishandling Katrina claims six years later.²⁸

In 2004, hurricanes Ivan and Frances sparked similar stories of denied claims, with insurance companies attributing hurricane damage in some cases to termites.²⁹

“The bottom line is that insurance companies make money when they don’t pay claims,” said Mary Beth Senkewicz, a former senior executive at the National Association of Insurance Commissioners.³⁰

Pulling up stakes

After an insurer has denied claims, whether by fair means or foul, its next step—according to the industry playbook—is to cancel, or threaten to cancel, policies. In March 2007, just days after the expiration of an emergency rule preventing insurance companies from canceling customers hit by Katrina, Allstate dropped nearly 5,000 customers for allegedly not showing intent to repair their properties.

An investigation by the Louisiana Insurance Department found that the cancellations were unjustified. State Insurance Commissioner Jim Donelon said, “At best, it was a very ill-conceived and sloppy inspection program. At worst, they wanted off of those properties.”³¹

The last few years have seen a rush of cancellations and dropped policies across the country:

• In Massachusetts, six insurers have stopped selling or renewing policies in the past two years, leaving 45,000 homeowners without coverage.
• In New York, Allstate refused to renew 30,000 policies.
• In Florida, Allstate handed off 120,000 homeowners to a start-up insurer.
• In Texas, Allstate and five other companies canceled a total of 100,000 homeowners policies.
• In Connecticut, the state attorney general subpoenaed insurance companies for threatening to cancel thousands of policies if homeowners did not install storm shutters within 45 days.
• In South Carolina, most insurers have stopped selling coverage along the coast.

In fact, nationwide, over one million homeowners have found themselves looking for new insurance or dealing with a weakened policy.³²

Once again, this strategy is nothing new. After the Oklahoma tornadoes, State Farm stopped writing new homeowners policies.³³In 1995, State Farm announced plans to cut back on new homeowners policies and raise premiums in northern Texas after a series of storms.³⁴

Within days of the 9/11 terrorist attacks, executives at Swiss Re, the second-largest reinsurer in the world, told White House officials that the company would no longer provide coverage to the property-casualty industry for future terrorism losses. The move was part of a lobbying effort seeking government-funded relief from terrorism risks.³⁵

More than 20 years ago, the strategy of threatened withdrawals was outlined by John Byrne, chairman and CEO of Geico Corp., who said, “[T]he goal is to withdraw [from the market] and let the pressure for reform build in the courts and in the state legislatures.”³⁶

Profiteering from catastrophe

Perhaps the most reprehensible insurance industry tactic has been the use of disastrous events to jack up premiums. Taking advantage of catastrophe to raise rates has become so common that industry officials no longer bother to hide it.

Hurricane Katrina “is a significant event for our company,” said Jeff Radke, CEO of PXRE, a Bermuda-based reinsurer, during a presentation at one post-hurricane industry conference. He added, “Our loss will leave us with enough capital to really thrive in the market opportunity that’s going to follow. . . . Following an event like Katrina, given how bullish we are about that market, this is one of those happy cases where if a rating agency were to insist that we raise capital to maintain our rating, it wouldn’t trouble us much at all.”³⁷Evan Greenberg, chief executive of Ace Ltd., a large Bermuda-based commercial insurer, recently said Hurricane Katrina was a “market-changing event” that would require price hikes in sectors beyond property insurance.³⁸

Examples of industry profiteering in previous times of crisis are rife. The day Hurricane Andrew hit South Florida in 1992, AIG Executive Vice President J.W. Greenberg sent a memo to company presidents throughout the country, saying, “We have opportunities from this and everyone must probe with brokers and clients. Begin by calling your underwriters together and explaining the significance of the hurricane. This is an opportunity to get price increases now. We must be the first and it begins by establishing the psychology with our own people. Please get it moving today.”³⁹

Some insurers also saw the 2001 terrorist attacks as an opportunityto take in more cash, even as industry executives were pushing for a federal cap on liability. Lloyd’s of London described the attacks as a “historic opportunity” to make money, noting that premiums “had shot up to a level where very large profits are possible.”⁴⁰ A month after 9/11, Maurice Greenberg, chairman of AIG, told investment analysts that opportunities for his company “have never been greater.”⁴¹Henry Keeling, the chief executive of XL Re, a Bermuda insurer, told an industry conference that “the opportunity out there is tremendous.”⁴²

Obliging shareholders

In 1987, III executives were as proud of the industry’s role in the American economy as their present-day counterparts. There was no mention of shareholders. The state-of-the-industry analysis concluded, “Altogether [the industry] provides nearly 2 million jobs and has responsibility for assets which at the end of 1986 totaled more than $1.3 trillion. But its greatest significance in the American economy is as an absorber of personal and business risks.”⁴³

Twenty years later, profits have trumped policyholders. Consider industry leader Allstate. The insurer has been at the forefront of efforts to maximize profit and minimize losses or claims. Its current president and CEO, Thomas Wilson, recently said Allstate has “begun to think and act more like a consumer products company.”⁴⁴ This strategy has enabled Allstate to provide its investors with a return double that of the S&P 500, but only at the expense of policyholders, who have been the victims of cancellations, nonrenewals, and punishing loss-prevention techniques.⁴⁵ Wilson has made his company’s priorities clear, saying, “Our obligation is to earn a return for our shareholders.”⁴⁶The insurance industry has lost sight of its original mission and its responsibility to the public. Now it answers only to Wall Street.

David Ratcliff is the research director at AAJ.

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1. See Ins. Info. Inst., Insurance Facts: 1987-88 Property/Casualty Fact Book (Oct. 1987).

2. Robert P. Hartwig, Ins. Info. Inst., Industry Financials and Outlook: 2006—First Nine Months Results, www.iii.org/media/industry/financials/2006firstninemonths [hereinafter Hartwig, 2006 Financials]; Robert P. Hartwig, Ins. Info. Inst., Groundhog Forecast for 2006, at 4, http://server.iii.org/yy_obj_data/binary/749787_1_0/2006%20Groundhog%20Forecast.pdf (Feb. 3, 2006); Robert P. Hartwig & Claire Wilkinson, Medical Malpractice Insurance, 1 Ins. Issues Series 1, 2, 7-8, http://server.iii.org/yy_obj_data/binary/729103_1_0/Medmal.pdf (June 2003). For the value of California’s cap, enacted in 1975, adjusted for changes according to the Consumer Price Index, see http://stats.bls.gov.

3. Hartwig, 2006 Financials, supra n. 2.

4. George J. Church, Sorry, Your Policy Is Cancelled, TIME (Mar. 24, 1986) (Web site shows a 2005 date), www.time.com/time/magazine/article/0,9171,1075044,00.html (June 21, 2005).

5. Jordan Schrader, Skyrocketing Insurance Costs in the Wake of Sept. 11 Prompt Sanilac Grower to Call It Quits, Times-Herald (Port Huron, Mich.) A1 (July 18, 2002).

6. Ins. Info. Inst., Facts and Statistics, Property/Casualty Insurance Cycle, www.iii.org/media/facts/statsbyissue/pcinscycle.

7. Robert P. Hartwig, Ins. Info. Inst., Industry Financials and Outlooks: 2004—Year End Results, www.iii.org/media/industry/financials/2004yearend.

8. Robert P. Hartwig, Ins. Info. Inst., Special Report: Groundhog Forecast for 2005, http://server.iii.org/yy_obj_data/binary/738904_1_0/2005%20Groundhog%20Forecast.pdf (2004).

9. Id.

10. Press Release, Ins. Servs. Office, Inc., Hurricane Backgrounder: Claims and Property Loss Information, www.iso.com/index.php?option=com_content&task=view&id=2295 (June 1, 2006).

11. H.R. Subcomm. on Oversight & Investigation of the Comm. Fin. Servs., Insurance Claims Payment Processes in the Gulf Coast after the 2005 Hurricanes, 110th Cong. 10, http://server.iii.org/yy_obj_data/binary/768660_1_0/Hartwig%20Hurricane%20Oversight%20Testimony.pdf (written testimony of Robert P. Hartwig, President, Ins. Info. Inst.) (Feb. 28, 2007); Press Release, Ins. Info. Inst., Record Homeowners Insurance Claim Payments from 2005 Hurricanes Equal to 25 Years of Louisiana Homeowners Premiums, Says III, www.iii.org/media/updates/press.748181 (Jan. 5, 2006).

12. Robert P. Hartwig, Ins. Info. Inst., Commentary on Full-Year 2005 Results 10, 1, http://server.iii.org/yy_obj_data/binary/753200_1_0/Year%20End%202005%20Commentary.pdf (Apr. 18, 2006).

13. Robert P. Hartwig, Ins. Info. Inst., Industry Financials and Outlook: Special Report: Earlybird Forecast 2006, www.iii.org/media/industry/financials/forecast2006.

14. Hartwig, 2006 Financials, supra n. 2.

15. Robert P. Hartwig, Ins. Info. Inst., Industry Financials and Outlook: 2006—Year End Results, www.iii.org/media/industry/financials/2006yearend.

16. Ams. for Ins. Reform et al., Property/Casualty Insurance in 2007: Overpriced Insurance, Underpaid Claims, Declining Losses andUnjustified Profits 8, www.consumerfed.org/pdfs/2007Insurance_White_Paper.pdf (2007).

17. Hartwig, 2006 Financials, supra n. 2.

18. Ins. Info. Inst., supra n. 1.

19. Ams. for Ins. Reform et al., supra n. 16, at 7.

20. Spencer S. Hsu, Insurers Retreat from Coasts, Wash. Post, www.washingtonpost.com/wp-dyn/content/article/2006/04/29/AR2006042901364.html (Apr. 30, 2006).

21. Hartwig, 2006 Financials, supra n. 2.

22. Strong Insurance Company Finances Benefit Consumers, Says AIA, InsuranceBroadcasting.com, www.insurancebroadcasting.com/011807.htm#6 (Jan. 8, 2007).

23. Annys Shin, Do Insurance Profits Come at Consumer Expense, http://blog.washingtonpost.com/thecheckout/2007/01/are_insurers_making_money_at_c.html (Jan. 10, 2007).

24. Reuters, Mississippi Sues Insurers over Katrina Claims, USA Today, www.usatoday.com/money/industries/insurance/2005-09-15-miss-insure_x.htm (Sept. 15, 2005).

25. Associated Press, Insurers See Katrina as Two Events (Sept. 9, 2005).

26. Solomon Moore, State Farm Accused of Forgery to Avoid Claims, L.A. Times B1 (June 4, 1997). The text of the statement by former State Farm claims specialist Amy Zuniga is available at www.monttla.com/zuniga.htm.

27. Watkins v. State Farm Fire & Cas. Co. , No. CJ-2000-203 (Okla., Grady Co. Dist. May 25, 2006); Kathleen Johnston, State Farm Penalized in Suit over Tornado Claims, www.cnn.com/2006/US/05/26/statefarm.verdict (May 26, 2006).

28. Associated Press, State Farm Questioning Haag Engineering Firm’s Katrina Work, Ins. J., www.insurancejournal.com/news/southeast/2006/09/25/72759.htm (Sept. 25, 2006).

29. See e.g. Kelso v. Universal Prop. & Cas. Co., No. 05000518CA (Fla., Martin Co. Cir. Apr. 19, 2006); Jill Ingram, Peeks Creek Residents Contest Insurance Denials, Citizen-Times (Asheville, N.C.) (Nov. 19, 2004).

30. Charles Duhigg, Aged, Frail, and Denied Care by Their Insurers, N.Y. Times, www.nytimes.com/2007/03/26/business/26care.html?ex=117 (registration required) (Mar. 26, 2007).

31. Stephanie Grace, Bad Policy: Allstate Cancellations Draw the Scrutiny of Insurance Commissioner Jim Donelon, Times-Picayune 7 (Mar. 11, 2007); see also Carmel Sileo, Allstate Ordered to Reinstate Policyholders in Post-Katrina Settlement, TRIAL 84 (May 2007).

32. Peter G. Gosselin, The New Deal: Insurers Learn to Pinpoint Risks—and Avoid Them, L.A. Times 1 (Nov. 28, 2006).

33. Don Mecoy, Insuring America: Homeowners Due Insurance Help, The Oklahoman 1 (Sept. 10, 2003).

34. See Jim Mitchell, Insurers Seek Policy Changes in Wake of Texas Storm Claims, Dallas Morn. News (Sept. 18,1995).

35. See Stephen Labaton & Joseph Treaster, Insurers Push for Cap on Future Payouts, N.Y . Times B7 (Oct. 22, 2001).

36. Jeannie H. Cross, Citizen Group Charges Collusion by Insurers, Alb. Times Union B7 (Apr. 17, 1986).

37. Susanne Sclafane, Looking Past Devastation, Execs See Positive Trends, Natl. Underwriter P&C, http://goliath.ecnext.com/coms2/gi_0198-257675/Looking-past-devastation-insurers-see.html#abstract (Sept. 12, 2005).

38. Dean Starkman, The Cost of Insurance, Wash. Post D1, www.washingtonpost.com/wp-dyn/content/article/2005/11/07/AR2005110701461.html (Nov. 8, 2005).

39. Albert B. Crenshaw, Insurer Sees Hurricane As Chance to Boost Rates; AIG Memo Sent Out as Storm Crashed Ashore, Wash. Post A1 (Sept. 5, 1992).

40. Pallavi Gogoi & Mike McNamee, Insurance: The Coverage Crunch, Bus. Week 122 (Nov. 19, 2001), www.businessweek.com/magazine/content/01_47/b3758098.htm; BBC News, Lloyd’s Slammed for “National Disgrace,” http://news.bbc.co.uk/hi/english/business/newsid_1626000/1626414.stm (Oct. 29, 2001).

41. James Flanigan, Higher Premiums Are Likely to Slow Economy, L.A. Times 1 (Oct. 21, 2001).

42. Joseph B. Treaster, Insurers’ Outlook (Unexpectedly) Good, Despite Big Claims, N.Y. Times C4 (Dec. 17, 2001).

43. Ins. Info. Inst., supra n. 1, at 5 (emphasis added).

44. Thomas J. Wilson, Pres. & CEO of Allstate Ins. Co., Remarks (Merrill Lynch Insurance Investor Conference, New York, N.Y., Feb. 13, 2007), http://media.allstate.com/categories/24-speeches/releases/4053-merrill-lynch-insurance-investor-conference-remarks-thomas-j-wilson.

45. See also Edward M. Liddy, Chairman & CEO of Allstate Ins. Co., Remarks (Credit Suisse Ins. Conference, New York, N.Y. Nov. 17, 2006), http://media.allstate.com/categories/24-speeches/releases/4051-credit-suisse-insurance-conference-remarks-edward-m-liddy.

46. Hsu, supra n. 20; see also David Berardinelli, An Insurer in the Grip of Greed, on page 32 of this issue.

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