Property/Casualty Insurance in 2007: Overpriced Insurance, Underpaid Claims, Declining Losses and Unjustified Profits

08/01/2007

Executive Summary

THE PERCEPTION CULTIVATED BY INSURERS: PROPERTY CASUALTY
INSURANCE IS A HIGH-RISK BUSINESS THAT IS FINANCIALLY THREATENED BY CATASTROPHIC WEATHER AND TERRORIST EVENTS

For policymakers and Americans who do not pay close attention to insurance markets, it would be easy to assume that the property/casualty insurance industry is in financial peril because of the risk inherent in offering insurance in a world where weather events and terrorism attacks seem to be more frequent and more catastrophic. After all, in recent years, insurers have had to pay claims for the losses associated with the September 11th terrorist attacks and several of the most destructive hurricanes in U.S. history.

It is not surprising therefore, that when insurance companies petition Congress for federal assistance in covering terrorism or natural catastrophe losses, Senators and Representatives are
often inclined to believe that such assistance may be necessary. When coastal states (including California, in the case of earthquakes) are asked to create risk pools so that insurers have a place to steer higher risk consumers, state regulators and legislators often agree that the industry is not in a financial position to cover such risk. When insurers sharply boost premiums on the coasts, increase deductibles, refuse to renew policies or otherwise cut back coverage, policymakers often
accept these steps as necessary to help the property/casualty insurance business meet the huge challenges it faces in a risky world filled with dangers that it cannot adequately measure. Many states have also been compliant when asked by insurers to reduce consumer protections in response to higher risks that insurers claim to face, such as a supposed rush by Americans to
settle in coastal areas that are more dangerous.

The perception, then, is that insurance has become an inherently unstable business that generates profits insufficient to  compensate for the extraordinarily high risk that insurers face.

THE REALITY: LOW RISK AND UNJUSTIFIABLY HIGH PROFITS

The financial reality of the property/casualty insurance industry couldn’t be more different than the carefully cultivated perception fostered by insurers. Insurers are paying out lower claims, charging higher premiums, reaping greater profits, and are more financially solid than at almost any time in history. Moreover, insurers are poised to continue to reap hefty profits for years.