Critics keep hammering property-casualty insurers for making too much money, yet their profits pale in comparison to Big Oil. Exxon Mobil alone reported a record $40.6 billion in net income last year, compared to $49.4 billion for the entire p-c industry combined through three-quarters. What gives?
Most people have no problem with state governments limiting what insurers can charge for homeowners, auto or other critical coverages.
In fact, if carriers don't bend to the will of politically-motivated politicians and regulators, they get sued, have their licenses revoked, or are extorted by threats to take away their authority to write more lucrative lines unless they stay in the market and keep undercharging policyholders on another money-losing coverage.
I think we should extend that thinking to the oil industry. States should pass laws making gasoline $1 per gallon! Not a penny more! If the oil companies don't like it, too bad! What can they do about it? Stop selling gas in the entire state?
And while we're at it, let's set price ceilings on the drug companies! We shouldn't have to wait for a newly discovered drug to go generic before it can be cheaply sold, right? A dime a pill sounds about right. No more!
Of course, critics warn that taking such a short-sighted stance will only discourage firms from looking for new sources of oil, or from researching life-saving drugs. And they're right.
But when one makes this argument in favor of insurers, the industry is seen as shameless profiteers. The public doesn't understand that if insurance rates are artificially supressed, just like with oil or drugs, investors are discouraged from taking the necessary risks to do business. The market contracts, and consumers are left in the lurch.
Why is it that insurers cannot make this argument convincingly? Why is it that "actuarially sound" rates that actually cover the risks being taken are such dirty words among consumer advocates and regulators?
Is it a fundamental misunderstanding of free-market economics, an abuse of government authority, or both?
I would say a little of both. Most people do not understand how insurance operates. The fact that carriers pay billions in claims doesn't register collectively. Insurers collect money, and never pay anything back. Given that stereotype, rate suppression seems only fair.
Meanwhile, no state lawmaker gets elected by raising insurance rates. If rates are going up, and the government appears impotent to stop insurers from hiking their premiums, the politicians are seen as ineffective. Better to stiff the insurers than the voters, right?
Myopic? Of course. Thus, insurers must continue to press the issue and make their case. People--especially politicians--have very short memories. The industry must remind everyone about the consequences of rate supression if they are to have any hope of retaining anything resembling a free market in insurance.
Comments (2)
Oh, Sam, I am disappointed.
No one likes the profit big oil is making, but you cannot compare the profit made on a limited energy resource sold at open auction on a world stage to the profits made on an unlimited contrived financial product that provides such a high rate of return (risk weighted) that there are literally hundreds (thousands?) of insurance companies in this country alone.
The insurance industry has absolutely no problem attracting capital. That fact alone is evidence enough of its attractive risk/reward ratio.
And how can you say that insurers need to increase rates at all? When consumers hear that the combined ratio of auto insurers is somewhere between 65 and 75, then they are correct to assume that they are being overcharged by 20-to-40 percent, even after a fair profit of 10 percent for the insurer (and we are not even talking about non-standard auto).
I am tired of hearing the industry mantra: "But we paid out $20 billion in claims last year and no one appreciates us." Yes, but the industry was under contractual obligation to pay that. That was not some act of charity, as the insurance industry portrays it. Gee, should we brag that we spent $10 billion to pay our electricity bills? Or that we paid our heating bill?
In addition, the industry never adds the footnote that it collected $40 billion in premiums to cover that $20 billion last year, or that perhaps if they treated their customers fairly, that $20 billion in claims would have been $30 billion.
We do not want to get into a discussion about underwritten claims--the quick cash settlement. Good-faith claims handling? How about those computer-generated loss-valuations? If they only knew…
I love your thought-provoking articles, Sam, but myopic was an understatement.
Posted by Insured Consumer | February 5, 2008 9:25 AM
Posted on February 5, 2008 09:25
I do agree with Insured Consumer's comments, and would just add that it seems to be part of the larger trend I have been noticing in all industries.
I think of it as the "No matter what the circumstances, my profit margin must remain the same" strategy. Back in 'the day,' it seemed as though companies had real cycles--one year you made money, maybe the next you didn't. Now, it seems as though it's become an entitlement!!
IMHO.
Posted by Gail | February 5, 2008 11:06 AM
Posted on February 5, 2008 11:06