[StBernard] Insurers, critics face off over record 2006 income

[Westley Annis]

The headline numbers were eye-popping: Allstate reported a record $5 billion
profit for 2006. State Farm Insurance's profit climbed 65 percent for the
year. St. Paul Travelers' earnings rose sixfold in the fourth quarter,
American International Group's rose eightfold.
 
A year and a half after Hurricane Katrina devastated the Gulf Coast, profits
at the nation's major property-casualty insurance companies soared - and are
expected to be strong again in 2007, according to estimates by the A.M. Best
Co. rating agency.
 
Critics charge that the insurers are doing well financially by shorting the
people who bought their products - including hundreds of consumers who still
haven't gotten settlements for their Katrina claims. The industry, in turn,
denies taking advantage of consumers, crediting its growing profitability
instead to fewer storms last year and improved business procedures and other
lines of business, such as auto insurance.
 
One of the harshest critics, J. Robert Hunter, director of insurance for the
nonprofit Consumer Federation of America in Washington, D.C., accuses the
nation's insurers of using Katrina and other major hurricanes to try to
justify "overpricing insurance, underpaying claims and reaping unjustified
profits" at the expense of homeowners and business owners.
Hunter, a former Texas state insurance commissioner, added that he expects
the industry to continue to do exceptionally well because it is pushing more
risk and more cost onto policyholders.
 
"They're making homeowners and business owners take on more of the risk
through high deductibles, caps on replacement costs and other limitations,"
he said. "And they're refusing to renew tens of thousands of homeowner and
business property policies, especially along the coasts."
 
Hunter argues that state regulators "have not done the job to control
excessive prices" charged by the insurers.
 
Louisiana Insurance Commissioner Jim Donelon disgreed with Hunter.
 
"I do not believe that political regulation is the vehicle by which we will
access more affordable and available insurance for our businesses and
citizens," Donelon said. "I think the true best source of new coverage and
affordable rates is more competition amongst those in the business."
 
Donelon said the insurance industry's record profits are good news for
Louisiana because that increases the likelihood that insurers will return to
the state in a more-aggressive fashion.
 
For consumers, the situation is both frustrating and financially burdensome.
Joyce Ridgeway, whose four-family house in the Esplanade Ridge neighborhood
of New Orleans was damaged when Katrina hit in August 2005, is still waiting
for a final settlement from British-based insurer Lloyd's. She's so far
received $30,000 toward the $85,000 needed to cover alternative living
expenses and to repair the roof, gutters and wood siding wrecked by the
storm.
 
Ridgeway, a 52-year-old public health worker, is frustrated that she's still
living on the property in a trailer provided by the Federal Emergency
Management Agency. Tenants are back in just two of the units.
 
"I've been doing bits and pieces as I can to get repairs done," she said. "I
took my savings, I take my paychecks - and I have a good contractor who is
working with me."
But, she added, "I've waited so long. It just doesn't seem fair."
 
A Lloyd's spokesman said that if a claim couldn't be resolved locally, it
could be referred to the company's dispute resolution department. He added:
"We have not received any formal complaint on this matter so are unable to
comment any further."
 
State Farm spokesman Dick Luedke said the insurer pays what it owes, whether
the company makes billions of dollars, as it did this year, or losing
billions, as it did in  2001.
"Overpricing? Our auto rates declined in 2006 by 2.2 percent," Luedke said.
"That was the third year in a row that our auto rates have gone down."
 
Auto rates have fallen more than 10 percent since 2003, he said.
 
Allstate spokeswoman April Eaton said the common misconception is that
profitability determines insurance rates. But Allstate bases its rates on
the risks in each market, along with other factors including state rules and
regulations, she said.
 
In addition, Allstate's profit is the result of a diverse portfolio of
products sold throughout the country, not just homeowner's coverage in
Louisiana, Eaton said. For example, the auto side of the business generated
much of the company's profit.
 
Industry experts argue that the property-casualty insurers did amazingly
well in handling Katrina - the most costly catastrophic event ever in the
United States - and the other hurricanes in 2004 and 2005.
 
Robert Hartwig, president and chief economist with the New York-based
Insurance Information Institute, points out that the industry has so far
"paid $41 billion on 1.74 million claims for Katrina alone - and for the
combined 2004-2005 hurricane season, we paid about $81 billion in insured
hurricane-related losses."  ***(see comment below)
 
The industry's profits rose in 2006 in part because there were far fewer
storms, Hartwig said.
And, he added: "But the good results have more to do with the fact that
insurers saw good results in auto insurance, workers comp and a variety of
other areas and in states that don't have a coastline."
 
Rating agency A.M. Best estimates that the property-casualty industry earned
$68 billion in 2006, up from $49 billion in 2005, and that profits could
total $62.2 billion this year if the storm season is relatively benign.
 
As a result, the policyholder surplus - essentially reserves to cover future
claims - grew to a record of nearly $500 billion in 2006, A.M. Best
estimates.
 
There also has been a change in how the industry actually makes its profits.
Insurance companies traditionally made most of their money by investing
consumers' premiums, mainly in bonds. But increasingly, they're relying on
so-called underwriting profits, which are premiums minus losses and
administrative expenses.
 
As a result, Hunter, the consumer activist, said that insurance companies
have sharply reduced the percentage of premiums paid out in claims. He
estimates payouts fell below 70 percent of premiums in 2006, far below the
80 percent that prevailed in the 1990s.
 
Greg Heidrich, senior vice president for policy development and research
with the Property Casualty Insurers Association of America trade group in
Des Plaines, Ill., said it was unfair to look at the payout ratio for a
single year or a short period of time.
 
He said that property insurers in Louisiana in 2004 paid out $20 billion in
claims, or the equivalent of 20 years worth of premiums collected in the
state. After that, Heidrich said, "you want those companies to build back
their capital base so they're in a position to pay claims that could be at
extraordinary levels in other years."
 
He also said that more than 95 percent of all the hurricane claims have been
settled, "so I have to reject out of hand the notion that profits in 2006
are driven by people not paying claims."
 
At the same time, he said, he "understands the concerns" of those still
waiting for settlements - especially those caught in disputes over whether
the damage came from wind or flood. Homeowners policies typically cover wind
damage, but not flood damage.
Genio Staranczak, chief economist with the PCIAA, said that insurance
companies also have become better at protecting themselves by spreading
risk, mainly by buying reinsurance. Reinsurance is basically insurance for
insurers. He estimated that 45 percent of the 2005 hurricane season losses
were borne by reinsurers.
 
Eileen A. Frank, a New York insurance broker who grew up in Louisiana and
maintains an office in New Orleans, said that while many hurricane claims
have been settled, many others still are pending.
 
She said that she and others in the industry tried to help clients by
pulling together their claims and supporting documents, only to be referred
by insurance companies from one adjuster to another and to yet another.
 
"Payments that should have been made without question are still not being
delivered," she said.
 
Meanwhile, it has become harder for families and small businesses in coastal
states to get affordable property insurance coverage.
 
Frank, who is a member of the Independent Insurance Agents and Brokers of
New York, said that insurers wary of predictions of more-active storm
seasons don't want new customers - or are not renewing old ones.
 
A policy she handled recently for a multifamily house cost the owner $6,000,
up from less than $2,000 before Katrina. And, Frank said, it had a
deductible for wind damage equivalent to 5 percent of the value of the
house.
"Pricing has gone through the roof," she said. "And I don't think we've seen
the end of it."
 
** What bothers me the most is the insurance companies continue to cite the
81 billion number but I've never seen it broken down by how much was paid by
flood and how much by homeowners policies.
 
JLY