Even in the best of times, the insurance industry has never enjoyed the most stellar public image. For most consumers, coverage always costs too much and claims are never paid quickly enough. But in the worst of times, when insurers are accused of knowingly misleading or even cheating policyholders, the political consequences can be overwhelming.
Insurers were certainly on the hot seat in 2007, mainly because of the lingering fallout over disputed Hurricane Katrina wind-versus-water claims. There were two particularly low moments that jump to mind.
One was at the end of February, when I witnessed a Congressional bashing of the industry firsthand. Rep. Gene Taylor—the Mississippi Democrat who made it his mission to punish insurers after his own Katrina homeowners claim (since settled) was denied due to the flood exclusion—was both witness and interrogator at a hearing of the House Financial Services Subcommittee on Oversight and Investigations.
Allegations were raised of adjusters forced to alter reports so that Katrina losses could be blamed on uncovered flooding. On a broader scale, the industry was criticized for reporting high profits the prior two years, while many Katrina claims were unfairly denied or stalled. Charges of collusion were voiced without any hard evidence to back them up, but the damage was done.
Robert P. Hartwig, newly installed as president of the Insurance Information Institute, was the sole witness for the industry’s defense, yet he was more of a sacrificial lamb—his retorts mostly falling on deaf years as members took turns skewering insurers for alleged misconduct.
The second low point was publication of a cover story in the September edition of Bloomberg Markets, with the devastating headline: “The Insurance Hoax.” The article went on to document in great detail how major carriers were allegedly adopting a policy of denying legitimate claims whenever possible to boost profits.
“The insurance companies routinely refuse to pay market prices for homes and replacement contents, they use computer programs to cut payouts, they change policy coverage with no clear explanation, they ignore or alter engineering reports, and they sometimes ask their adjusters to lie to customers,” the article charges, with most carriers declining to comment because many of the disputes were still in litigation.
“As Mississippi Republican U.S. Senator Trent Lott and thousands of other homeowners have found, insurers make low offers—or refuse to pay at all—and then dare people to fight back,” the article added. (The fact that Republicans and Democrats can set aside their bitter rivalry to gang up on the insurance industry shows how deep-seated anti-insurer resentment runs.)
Insurer integrity was also called into question in Florida, for failing to lower rates sufficiently following passage of a reinsurance support bill, and in California, when carriers were blamed for so many homeowners being underinsured when wildfires ravaged the state).
The backlash was considerable, with talk of removing the industry’s federal antitrust exemption, thousands of lawsuits filed to challenge the standard flood exclusion, and a drive in Congress to add wind coverage to the National Flood Insurance Program.
But the bottom line is that little has changed. Insurers settled many disputed claims by paying at least partial damages, but the basic flood exclusion has survived. McCarran-Ferguson’s antitrust immunity remains intact, and the NFIP is still flood-only.
Meanwhile, I spoke out on a number of occasions in my column, blog and in public appearances about the need for insurers to be more proactive with the media in good times and bad.
Often, I felt like I was talking to a wall, but there were some signs that at least a few industry leaders—such as David Sampson, the new president and CEO of the Property Casualty Insurers Association of America—understand what needs to be done to create and sustain a more positive image.
In the short term, with Sen. Lott leaving the Senate by year’s end, insurers are being relieved of one major critic who backed numerous bills to either investigate or regulate the insurance business.
With the number of outstanding Katrina claims dwindling, and even the property market softening, insurers should have an opportunity to catch their breath and regroup—at least until the next inevitable mega-disaster or scandal hits.
Do you folks agree???
Comments (6)
While Mr. Lott is leaving the Senate, he is going to lobby. Will he use that considerable influence that he can wield there to harm our industry?
We (as an industry) could do so much to mitigate the difficulties that we inflict upon ourselves.
Not to repeat too much, but the excess-profit issue becomes moot when a mutual structure is used and the regulations are followed (as with mutuals, excess profits are returned to the policyholders).
As a stock company CEO, there is so much pressure to maximize profits for the stockholders (Mattel anyone?).
Anytime you can increase profits (such as holding claim reserves for a few extra months or diminishing payouts), the temptation to do so must be overpowering. After all, one of your first priorities is to return value to stockholders.
When the claim gets paid in the end, the policyholder is usually pacified. If this is the case, it is a situation of "no harm, no foul" and the company benefits.
If the company successfully denies even 1 percent of claims, it could mean millions in profits and result in a nice return on investment for the stockholders.
Let's use Katrina for an example. If losses were in excess of $40 billion, then 1 percent represents $400 million. Nice tidy addition to the bottom line.
Viola! The CEO is a hero and did his job.
Perhaps we need to hold a different standard in order to restore our reputations. If we continue the current course, you have predicted correctly, Sam. We will be fine until the next megadisaster comes along.
Posted by Craig Dolan | December 28, 2007 10:52 AM
Posted on December 28, 2007 10:52
Well, so what is it that "needs to be done to create and sustain a more positive image"?
How about a "Report to our Policyholders" after a disaster--reporting on the number of claims made, the number settled (with timelines), the total and average amount paid or payable to/for those policyholders, and the total premium paid by policyholders within the disater area over, say, the prior 10 years?
And the results of a survey by a trusted third party about the level of satisfaction with the service and settlements policyholders received?
And for the unsatified ones, a breakdown of what they say they are unsatisfied about, with some illustrative examples, and the carrier's responding viewpoint about those complaints.
And then about the ones still unsettled--how about a breakdown of the reasons they are still unsettled, from both the policyholder's and the carrier's standpoint?
If the carrier's point of view is that the vast majority of policyholders are satisfied, and the minority who are not satisfied have no one to blame but themselves, the carrier should be prepared to prove it publicly like this.
And if this is not the case, then the carrier indeed has work to do to improve its performance--and the image will follow.
Posted by Mikk | December 28, 2007 1:33 PM
Posted on December 28, 2007 13:33
Sam, you could not be more right on with this post. The industry as a whole amazes me as to why they are not more proactive when the claims from big disasters happen.
Why don't the CEOs of the companies go to the area with the damage and tell the policyholders the company is here to help you? Why don't the companies fight the negative press proactively?
Craig makes excellent points about how the stock companies operate. If the current course is continued, then it will only get worse for the insureds.
My thinking is make the penalties for bad-faith claim pratices start around $1 million per occurance, with no cap for multiple occurances. If the penalty is large enough, it will have an impact.
Likewise good companies should be mentioned in the media--including through the state departments of insurance--for settling claims properly.
Also the policy language that allows an insurance company to pay actual cash value until things are replaced should be outlawed.
If an insured pays for replacment cost or reimbursement cost, then that is how the claim should be paid.
I am not a huge fan of government intervention, but sometimes things have to be done.
Posted by Dave | December 28, 2007 3:10 PM
Posted on December 28, 2007 15:10
The comments suggesting the industry should shift to an exclusively mutual structure are a bit naive in my opinion.
First, who would pony up the necessary captial to buy out the stockholders of the existing stock companies? Do you think they would just walk away from their holdings for the benefit of the policholders? I think not. Unless Bill Gates, Warren Buffet, and the Walton heirs all pool their money together and decide to donate it to the policyholders of Aerica, this won't happen.
Second, many of the companies being lambasted in the press already have a mutual structure (like State Farm), so I don't see how making more companies into mutuals would improve whatever perceived shortcomings the industry might have.
I do think the point that policyholders and consumers should be made more aware of the performance of insurance companies in times of catastrophe is valid. This would seem to be a natural role for regulators and consumer groups.
Posted by Observer | December 30, 2007 1:12 PM
Posted on December 30, 2007 13:12
What we need is a Louis Rukeyser or a Jim Cramer--a personality that can communicate what insurance is and is not.
Yes, we insure stupidity, but not malice.
Find a friendly face of insurance with charm, intelligence and wit for the Louis Rukeyser and brilliant energetic nutcase for Jim Cramer, and perhaps Motley Fools for the intelligent youthful market segment.
We just have to quit believing everyone else's hype and create our own.
We are boring to the uneducated! Finance had the same problem not that long ago!
Posted by Barbara J. Cook | January 2, 2008 10:49 AM
Posted on January 2, 2008 10:49
I concur wholeheartedly with MIkk's comments.
If the industry truly believes they are being drawn and quartered unfairly following a disaster, then prove it with facts and figures and truths from the people they serve. Not just satisfaction statements from those who were happy with their claims, but let's hear why people were not happy.
Underinsured, and by how much? Who was at fault for that? How many policyholders declined full coverage? Perhaps in wildfire areas, how many policyholders failed to take positive steps to safeguard their homes bu cutting back brush?
We don't have to name names, but we do need to improve the public trust if we're ever to climb out of this quagmire that we've taken so long to develop and firmly entrench ourselves in.
The secretive attitude along with the cuthroat pay-less claims mindset needs to be changed if we're ever going to be though of as an industry that truly cares about their clients.
Finally, let's see some of the companies do away with the commercials that insult the viewer's intelligence. I know this is way off the subject, but has anyone seen the Mercury Insurance commercials aimed at the California audience regarding low rates? They are not only idiotic, but even suggest things that are illegal and dangerous (the airline stunt with passengers in luggage, which has been tried by people in the past with life threatening if not deadly consequences!)
Time to grow up and be adults if they expect the audience to have an IQ above moronic!
Posted by BJ | January 2, 2008 1:09 PM
Posted on January 2, 2008 13:09