The Foundation for Taxpayer and Consumer Rights
Tel: 310-392-0522 € Fax: 310-392-8874 € Net: consumerwatchdog.org
For Immediate Release
Contact: Douglas Heller (310) 392-0522 ext. 309
Industry Report Shows Seeds of Future Insurance Crisis
A.M. Best explains the extraordinary profit as the result of “strong pricing
and restrictive policy terms and conditions over the past two years.” In
other words, profits were driven by skyrocketing premiums and dramatically
reduced policy benefits and coverage, said FTCR.
Property and casualty insurers netted $40.5 billion in profits and increased the
industry surplus to more than $400 billion in 2004, the data show. The profit
data point to excessive rates throughout the industry and expose the need for
tougher regulation of insurance companies, according to consumer advocates with
the FTCR.
“This data prove that insurers are charging more and more for fewer and fewer
benefits,” said FTCR’s Executive Director Douglas Heller. “The data
warrant an investigation by every insurance commissioner in the nation into why
insurers are claiming the need for special limits on consumers legal rights when
they are price gouging the American public.”
The statistics show that, for the first time since 1978, insurers profited from
their policy sales (known as underwriting) even before accounting for $41
billion in investment earnings. Because insurers are allowed to invest
policyholders’ premiums and reap the returns, insurers make their profit from
these investment returns and not from underwriting, as had been the case every
year since 1978. In 2004, the industry had approximately $800 billion in
policyholder premiums and surplus with which to invest.
FTCR points to
“Because insurance company rates are deregulated or poorly regulated in most
states, insurers were allowed to overprice insurance policies to such a degree
that they broke a nearly three decade old profit record,” said Heller. “With
insurers drawn to the possibility of squeezing even more money out of
policyholders in 2005, lawmakers and regulators need to reform this industry by
implementing California-style regulation and consumer protections.”
Report Foreshadows Future “Insurance Crisis”
For decades it has been known that insurance industry pricing follows an
“insurance cycle,” which is tethered to the broader national and global
economy. When the economy stagnates or collapses and insurers’
investment income declines – as it did in the first years of this decade –
the industry declares an “insurance crisis” and, according to FTCR,
takes the following steps:
When the economy strengthens and investment returns rebound, insurance companies
begin to temper and then reduce premiums while investing premium and surplus
more aggressively. This leads to riskier behavior by insurers, inevitably
setting the industry up to declare another crisis when the economy softens.
FTCR noted that the last time the insurance industry netted underwriting
profits, in 1978, the nation had just emerged from the historic “insurance
crisis” of the mid-1970s. That “crisis” led to massive rate hikes
and severe legal restrictions across the states, including
Now, insurance companies are beginning to seal their fate once again as,
according to A.M. Best, “many insurers have shifted funds held as cash and in
short-term investment vehicles into stocks and bonds.” The infusion of
stock and corporate bond investments into insurers’ portfolios in the late
1990s led to a precipitous weakening of profits in the wake of Enron, WorldCom
and the other corporate scandals in 2001 and 2002.
Consumer groups argue that insurance companies’ premiums and business
practices should be far more regulated, as they are in
For more information about Proposition 103 and reforming the insurance industry,
visit http://consumerwatchdog.org/insurance/
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The Foundation for Taxpayer and Consumer Rights is a nonprofit, nonpartisan
organization.