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Insurers fight impression their big profits are at claimants’ expense

The headline numbers were eye-popping: Allstate reported a record $5 billion profit for 2006. State Farm Insurance’s profit climbed 65 percent. 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.

The industry, in turn, denies taking advantage of consumers, crediting its growing profitability instead to fewer storms last year and improved business procedures.

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 added that he expects the industry to continue to do exceptionally well because it is pushing more risk and 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.”

For consumers, the situation can be frustrating and financially burdensome. Joyce Ridgeway, whose 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 Lloyd’s. She’s so far received just $30,000 toward the $85,000 needed for living expenses and repairs.

Ridgeway is frustrated that she’s still living on the property in a trailer provided by the Federal Emergency Management Agency. “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.”

Industry defense

Industry experts argue that the property/casualty insurers did amazingly well in handling Katrina 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, about $81 billion in insured hurricane-related losses.

The industry’s profits rose in 2006 in part because there were far fewer storms, Hartwig said, adding, “But the good results have more to do with 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.”

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 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 premiums, mainly in bonds. But increasingly, they’re relying on underwriting profits.

Critic Hunter says that insurers 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 in the 1990s.

Greg Heidrich, senior vice president for policy research with the Property Casualty Insurers Association of America, said it’s 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 2005 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.

Genio Staranczak, chief economist with the PCIAA, said that insurance companies also have become better at buying reinsurance. 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. “Payments that should have been made without question are still not being delivered,” she said.

Meanwhile, it’s become harder for those 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 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. Frank said it had a deductible for wind damage equivalent to 5 percent of the value of the house.