Washington – A new study claims that the property/casualty insurance industry continued in 2007 to systematically overcharge consumers and reduce the value of home and automobile insurance policies, leading to profits, reserves and surplus that are at or near record levels. Not surprisingly, the study drew a sharp rebuke from members of the insurance industry.

The study, conducted by the Washington-based Consumer Federation of America (CFA), estimates that insurer overcharges over the last four years amount to an average of $870 per household.

“Consumers ultimately pay the price for the unjustified profits, padded reserves and
excessive capitalization that exist right now in the insurance industry,” says Robert Hunter, director of insurance for CFA and author of the study. Hunter says that the insurance industry reaped record profits in 2004 and 2005, despite significant hurricane activity.

“Profits in 2006 rose to unprecedented heights, and 2007 may set a fourth consecutive profit record,” he says. “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.”

Marc Racicot, president of the American Insurance Association (AIA) called the charges leveled by Hunter, an actuary, former state insurance commissioner and former federal insurance administrator, spurious.

“Predictably, Bob Hunter and the Consumer Federation of America are once again ignoring the facts and using the same old tired arguments to mislead the public into believing something that isn’t true,” Racicot says. “Our industry is highly competitive and property/casualty insurance policyholders have more layers of consumer protection than virtually any other segment of the financial services industry.

To backup his assertions, Hunter’s report cites 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.

Racicot disputes Hunter’s contention that customers are being shortchanged. “The rates consumers pay in each state must directly reflect the actual and expected loss experience within that one state–without exception,” he says. “We’ve been extraordinarily blessed that Mother Nature has spared those living in coastal communities, and we’ve been lucky that we haven’t had a significant hurricane over the past two years. The absence of any major storm or earthquake has allowed insurers to post two modestly profitable years. But it wasn’t long ago, 2004 and 2005, when our industry suffered record natural catastrophe losses. In fact, every other year over the past two decades, insurers lost money on their core business operations.”

Sources: CFA, AIA

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