Americans for Insurance Reform is a coalition of over 100 public interest groups from around the country working to increase accountability and oversight of insurance industry practices.
The Center for Economic Justice (CEJ) is a 501(c)(3) advocacy and education center dedicated to representing the interests of low-income and minority consumers as a class on economic justice issues. CEJ’s work focuses on administrative advocacy on insurance, utilities, and credit; the tools necessary for the poor to pull themselves out of poverty.
The Center for Insurance Research, based in Cambridge, Massachusetts, provides an independent voice for reform in debates about insurance, banks, financial services companies and related public policy issues around the nation. CIR focuses on national and state issues of insurance and financial services regulation in a range of areas including: mutual conversions, health care, illegal discrimination, insurance accessibility, cost reduction, quality assurance, disclosure, corporate and regulatory accountability.
Center for Justice & Democracy is a national consumer organization working to educate the public about the importance of the civil justice system.
Consumer Federation of America (CFA) is a non-profit association of 300 consumer groups, with a combined membership of more than 50 million people. CFA was founded in 1968 to advance the consumer’s interest through advocacy and education.
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education, and counsel about goods, services, health and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived form the sale of Consumer Reports, its other publications and services, and from noncommercial contributions, grants, and fees. In addition to reports on Consumers Union’s own product testing, Consumer Reports with approximately 5 million paid circulation, regularly carries articles on health, product safety, marketplace economics, and legislative, judicial, and regulatory actions which affect consumer welfare. Consumers Union’s publications and services carry no outside advertising and receive no commercial support.
Empire Justice is a non-profit legal services organization with offices in Albany, Rochester, White Plains and Central Islip (Long Island). Empire Justice provides support and training to legal services offices statewide, undertakes policy research and analysis, and engages in legislative and administrative advocacy. Empire Justice also represents low-income individuals, as well as classes of New Yorkers, in a range of poverty law areas including insurance and consumer law. In May 2005 Empire Justice released a report entitled “The Homeowners Insurance Gap: How Race and Neighborhood Composition Explain Cost and Access Disparities in Rochester and Monroe County, NY.”
The Florida Consumer Action Network is a grassroots organization which empowers citizens to influence public policy by organizing and educating in areas where consumer voices are underrepresented. It works to develop and mobilize activists from dozens of allied and affiliated organizations, including environmental, church, labor, civic, and senior citizen groups.
The Foundation for Taxpayer and Consumer Rights is a national leader on issues related to insurance, healthcare, energy and political reform. The nonprofit, nonpartisan organization is based in Santa Monica, California.
The Neighborhood Economic Development Advocacy Project (NEDAP) is a resource and advocacy center based in New York City. NEDAP’s mission is to promote community economic justice and to eliminate discriminatory economic practices that harm communities and perpetuate inequality and poverty.
New Jersey Citizen Action works to protect and expand the rights of individuals and families and to ensure that government officials respond to the needs of people rather than the interests of those with money and power. Through organizing campaigns that promote economic, social, racial and political justice, NJCA encourages the active involvement of New Jersey residents in challenging the public and private institutions and agencies that impact our lives.
Texas Watch is a non-partisan, advocacy organization working to improve consumer and insurance protections for Texas families. Texas Watch provides a platform for Texas consumers on insurance, nursing home resident protection, patient protection and consumer law issues in legislative and regulatory activities.
United Policyholders (“UP”) is a not-for-profit corporation founded in 1991 as an educational resource for the public on insurance issues and insurance consumer rights. UP monitors the insurance sector, works with public officials, has a nationwide network of volunteers and affiliate organizations, publishes written materials, files amicus briefs in cases involving coverage and claim disputes and is a general information clearinghouse on consumer issues related to commercial and personal lines insurance products. UP provides disaster aid to property owners across the U.S. via educational activities designed to illuminate and demystify the claim process.
I. EXECUTIVE SUMMARY
Property/Casualty insurance in America is overpriced. It has steadily become less of a good value for America’s consumers over the last generation, as determined by two widely used measures:
- Loss ratio, the portion of the premium dollar that is returned to consumers as benefits.Some types of insurance show very good value, particularly government social insurance programs, while others show poor value. A low loss ratio indicates poor value for consumers even if insurers are not earning high profits, as they have been in recent years. This study documents that loss ratios for property/casualty insurance (such as auto and home insurance) have sharply declined over the last 28 years. Today consumers receive about 55 cents back in benefits for every premium dollar spent. This amount is more than 20 percent less than benefit ratios seen as recently as 20 years ago.
- Profit, the return earned relative to the capital at risk. It is an undisputable fact that insurers have earned unprecedented profits in each of the last four years. The property/casualty insurance industry, however, claims that it is underperforming because other industries earn a higher return on equity (Return on equity, or ROE, is the amount of profit earned relative to the capital invested). This report documents in detail that the use of this comparison is highly misleading and leads to a false conclusion. In fact, the insurance industry dramatically understates its return on capital in several ways. For instance, it includes excess capital earned by mutual insurers like State Farm when calculating ROE, which makes the actual return look lower than it really is. In reality, the ROE earned by publicly traded insurers is equal to or more than that earned by Fortune 500 companies, while their investment risk is lower than that of those corporations.
The bottom line is that insurers are charging consumers too much. Competition, such as it is, has not protected consumers from excess prices and unfair rating schemes, including the growing reliance on “black box” technologies used by insurers to set rates that are not transparent to the public or accountable to policymakers.
This report also documents that the financial statements released by property-casualty insurers significantly understate their profits. This is because insurers have padded the reserves they put aside to pay for future claims by $80 billion more than the amount they will need to pay those claims. If these “redundant” reserves are considered, property-casualty insurers have earned profits of $305.1 billion over the last five years, equal to more than $1,000 from every person in America.
Another major conclusion of the report is that the property/casualty insurance industry has inflated the surplus it holds, by as much as $100 billion beyond the level needed to back up the underwriting risk they face. This inefficient capitalization has allowed insurers to launch massive stock buyback programs, to purchase other businesses, and to increase compensation for its managers to among the highest levels in American business.
The unjustified rates of recent years have led to excesses in both the surplus and reserves that property/casualty insurers hold. The Insurance Information Institute (“III”) says that the industry has “excess capital” of up to $100 billion. This does not reflect the $53 billion in reserves that Insurance Services Office (“ISO”) reports as “redundant.” Thus the amount of unwarranted funds collected from consumers that the industry itself has reported is as much as $153 billion. CFA estimates that this amount is probably closer to $175 to $200 billion. However, using even an ultra-conservative estimate of $100 billion in excessive surplus and reserves, Americans have been overcharged by the equivalent of $870 per household in the last four years (There are 115 million households in the U.S.). It would take more than five Hurricane Katrina-sized losses to eliminate these unwarranted reserves and surplus. Even if such an unlikely series of losses occurred, the insurance industry would still be extremely secure financially and consumers would still be paying excessive rates.
At the same time that the insurance industry is enjoying unprecedented profits, excess surplus and redundant reserves, this report reviews how many consumers have had to purchase overpriced insurance, have been abandoned by insurers on the nation’s coasts, and have confronted claims practices designed to systematically underpay the claims consumers dare to file.
The report concludes with proposals for public policy changes to reduce the excesses of the industry and better protect consumers.