After four hurricanes hit Florida in 2004 and Hurricane Katrina’s massive Gulf Coast devastation in 2005, insurance companies cried wolf and cried poor. Many claims were wrongfully delayed and denied, and policyholders with and without claims were charged increased renewal premiums or lost insurance coverage all together. The rumors circulated that many insurance companies would go broke (and some did), but according to a Consumer Federation of America report released earlier this month, there was no noticeable impact on the overall profits or loss-ratios of property-casualty insurers in either 2004 or 2005.
Insurance companies are in the business of making money. They are looking out for their bottom line and policyholders should be aware that, in general, the industry has enough funds to handle daily claims and withstand major catastrophe claims.
In The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk, the CFA report shows the surplus in numbers that are easy to understand,
Even if all of the top ten catastrophic events, including the September 11, 2001 attack, the Northridge Earthquake, and the top eight hurricanes, had occurred in the last year and had been paid for last week (a total of $162 billion in 2010 dollars after tax). the property-casualty industry surplus would still be $418 billion. . .
How has this happened?
According to the CFA, most of the savings has been achieved by hollowing out the coverage in homeowners insurance policies and raising rates.
The CFA report also provides suggestions on ways to curb the problem, and for state regulators, the CFA suggests the following:
- A careful examination rate requests and reviews of the reasons behind carriers exiting markets.
- The use of anti-concurrent language should be banned.
- Regulators, not insurers, should determine when a storm is classified as a hurricane in a state.
- States should join together to form interstate compacts to share in hurricane risks to provide a pool of policies and to spread risk.
At the federal level, CFA calls on the Federal Insurance Office to accumulate data similar to what is required of banks under the Home Mortgage Disclosure Act, allowing for detailed analyses of market stress and to assist in the formation of the interstate compacts.
To learn more about how profits drive insurance companies check out prior posts, Insurers Sacrifice Customers for Profit, Insurance Rates Go Higher With No Hurricanes? and Did State Farm Dupe Florida Leaders?