California Commissioner Says Insurers Earning “Excess Profits”
California Insurance Commissioner John Garamendi has released a new report on the profitability of homeowners and private passenger automobile insurance companies. According to the Commissioner’s office, “the study discloses that for the past two years, insurance companies have enjoyed a scenario in which the amount they pay for claims has dwindled, while the money they keep has soared.” The Commissioner has scheduled a hearing for July 20, at which he will examine this issue.
The following is his statement:
“For the past two years homeowners and automobile insurance companies in this state have profited immensely at the expense of consumers. A new study from my office shows that the more money these companies keep from your premiums, the less they pay out in claims. In my view, Californians are due for a break. If my understanding of these results is confirmed by my full review and hearing, I am confident that I will be ordering a significant number of insurers to reduce their rates.
“Homeowner insurance and personal auto insurance are essential tools for consumers, enabling them to drive legally, to own homes and to responsibly protect their assets. I have committed to see that homeowners’ insurance and private passenger auto insurance are available and affordable in this state. When insurers seek a seemingly endless string of premium increases, yet fail to offer premium relief, even during periods of good fortune, the system clearly needs review. I aim to provide such review immediately.
“As we embark upon this task, bear in mind that the insurance industry bitterly opposes my latest effort to rein in pricing and bring affordable, fair insurance to all. My new pricing reforms would require insurers to base auto insurance rates primarily upon how safely you drive, and not just where you live. The rules would reward good drivers and end the industry’s practice of punishing safe drivers with high premiums simply because they live in the ‘wrong’ zip code. The industry recently unleashed a $2.4 million advertising campaign attacking me and these reforms. The shady methods they employed in a failed attempt to intimidate me into delaying the reforms demonstrate the lengths to which they will go to protect this extraordinarily profitable market they currently enjoy.
“The report I release today focuses on an important measure of success or failure for insurers, called loss ratio. The loss ratio is a fair measure of the value of an insurance product from a consumer perspective. In the simplest terms, a loss ratio represents what an insurer spends to pay the claims of its customers, expressed as a percentage of its premiums. For instance, if a company collects $100 dollars in premiums and spends $40 of these premiums on customer claims, the company has a 40% loss ratio. This is important to understand, because the bottom line is that lower loss ratios translate to higher profits.
“As I indicated earlier, I am very concerned by what I am observing as a trend over the last two years. Beginning in 2004, loss ratios dropped markedly in the homeowners’ insurance market in California. Only four companies reported loss ratios exceeding 50% in 2004, and only five companies were in this category by the end of 2005. In 2004, when we began to see such significant drops in loss ratios, I directed my staff to continue to monitor the trend for one more year to determine whether these results were merely an aberration. We have recently completed our review of 2005 data and confirmed the trend continues. In fact some low loss ratios have declined even further.
“The lowest loss ratio reported in 2004 for the top 20 companies was a mere 24.23 percent. Another company’s loss ratio declined from 49.86 percent to 27.82 percent between 2004 and 2005. These companies are paying only 25 to 30 cents on claims for each dollar of premium they collect. The other 70 to 75 cents pays for administrative expenses and goes to the bottom line as profit. “The data we have collected shows that while companies eagerly filed applications to increase rates during periods of higher losses, there was no corresponding race to reduce rates as loss ratios tumbled.
“I am interested in seeing a healthy and prosperous insurance industry in California. But at the same time, the law requires that insurance company profits not be excessive. California voters have entrusted me with the responsibility of assuring that the premiums California homeowners pay are used to pay claims and provide a reasonable profit.
“In my view, some of the low loss ratios we are witnessing are an indication that profits and rates are excessive, and that consumers should be paying lower premiums. Today, I am announcing that I will hold rate reduction hearings in July to determine whether some of the rates consumers are paying are excessive and whether I should order insurers to lower their rates.
“Private passenger auto insurance presents a similar picture, even though the loss ratios we are seeing are not as low as those we have observed in the homeowners’ market. We reviewed the loss ratios for the 20 largest carriers in California that represent approximately 80 percent of the market. In the last several years there has been an overall decline in loss ratios for this line of insurance. Between 2002 and 2003 loss ratios declined for 18 of the top 20 carriers. Loss ratios declined further for all but two or three of the top 20 carriers between 2003 and 2004. Between 2004 and 2005 half of the top twenty carriers saw declining loss ratios in their automobile liability coverage. By 2005 the large majority of companies had loss ratios in the 50 percent to 60 percent range.
“While the case for excess profits is not as clear in the private passenger automobile insurance market, we must continue to be vigilant to ensure that these companies do not overcharge customers as their financial position continues to improve. We will review rates for the private passenger automobile market as we implement changes to our auto rating factors reforms. As I mentioned earlier, these changes to current practice are designed to ensure that premiums for auto insurance are based more upon how safely a person drives, than where the person lives. I believe that these companies are financially strong enough, and the rates they have been charging are high enough, that no consumer should have to bear an undue burden as we transition to the new rating methodologies.”
Source: CDI