The headline numbers were eye-popping: Allstate reported a record $5 billion profit for 2006. State Farm Insurance’s profit climbed 65 percent for the year. 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.
Critics charge that the insurers are doing well financially by shorting the people who bought their products — including hundreds of consumers who still haven’t gotten settlements for their Katrina claims. 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, a former Texas state insurance commissioner, added that he expects the industry to continue to do exceptionally well because it is pushing more risk and more 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.”
Hunter argues that state regulators “have not done the job to control excessive prices” charged by the insurers.
For consumers, the situation is both frustrating and financially burdensome.
Joyce Ridgeway, whose four-family 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 British-based insurer Lloyd’s. She’s so far received just $30,000 toward the $85,000 needed to cover alternative living expenses and to repair the roof, gutters and wood siding wrecked by the storm.
Ridgeway, a 52-year-old public health worker, is frustrated that she’s still living on the property in a trailer provided by the Federal Emergency Management Agency. Tenants are back in just two of the units.
“I’ve been doing bits and pieces as I can to get repairs done,” she said. “I took my savings, I take my paychecks — and I have a good contractor who is working with me.”
But, she added, “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 experts argue that the property-casualty insurers did amazingly well in handling Katrina — the most costly catastrophic event ever in the United States — 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, we paid 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.
And, he added: “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.”
Rating agency 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 — essentially reserves to cover future claims — 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 consumers’ premiums, mainly in bonds. But increasingly, they’re relying on so-called underwriting profits, which are premiums minus losses and administrative expenses.
As a result, Hunter, the consumer activist, says that insurance companies 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 that prevailed in the 1990s.
Greg Heidrich, senior vice president for policy development and research with the Property Casualty Insurers Association of America trade group in Des Plaines, Ill., said it was 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 — especially those caught in disputes over whether the damage came from wind or flood. Homeowners policies typically cover wind damage, but not flood damage.
Genio Staranczak, chief economist with the PCIAA, said that insurance companies also have become better at protecting themselves by spreading risk, mainly by buying reinsurance. Reinsurance is basically insurance for insurers. 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.
She said that she and others in the industry tried to help clients by pulling together their claims and supporting documents, only to be referred by insurance companies from one adjuster to another and to yet another.
“Payments that should have been made without question are still not being delivered,” she said.
Meanwhile, it’s become harder for families and small businesses 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 predictions 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. And, Frank said, it had a deductible for wind damage equivalent to 5 percent of the value of the house.
“Pricing has gone through the roof,” she said. “And I don’t think we’ve seen the end of it.”