Monday, February 20, 2006
Despite Hurricane Katrina: Insurance Industry Posts Second Most Profitable Year In History. Republican Congress comes through again.
Good policy: Reject claims of insurers
By Joanne Doroshow and J. Robert Hunter / New York Daily News
Last month, Allstate announced that recent Gulf Coast hurricanes had forced it to stop offering new homeowners policies in "storm-risky" New York City, Long Island and Westchester. The company also called for federal legislation to have taxpayers subsidize Allstate and other companies in these areas so they could resume coverage.
Sen. Chuck Schumer (D-N.Y.) lashed out, calling Allstate's assertions of a local hurricane risk "bogus" and attacking the "rapacious insurance industry" for manufacturing "a false crisis designed to pressure the federal government to create a taxpayer-financed disaster bailout system."
He has a point.
The insurance industry claims that it suffered losses of $40 billion to $60 billion because of Hurricanes Katrina and Rita - justification for rate hikes, coverage cutbacks and a federal bailout. But the dirty little secret is that the property/casualty insurance industry came out of 2005 with extraordinary profits - an estimated $35.6billion, the second-most profitable year in the history of the industry. And that follows a three-year period when profits exceeded $100 billion. In fact, 2004 was the industry's biggest year ever, despite the four hurricanes that ravaged Florida. Allstate alone earned $3 billion in both 2003 and 2004.
What's more, the industry had already planned for a year with the kind of hurricane claims it received in 2005. Specifically, in the wake of Hurricane Andrew, insurers changed how they set prices for coverage so they could handle claims from hurricanes even more severe than Katrina.
Clearly, this industry was not blindsided by the events of 2005.
This is not the first time that the property/casualty insurance industry has exploited a national crisis. Ten days after the Sept. 11, 2001, terrorist attacks, a delegation of 15 insurance executives met privately with President Bush and Secretary of Commerce Donald Evans at the White House in an effort to limit insurance companies' liability for future acts of terrorism. They demanded a multibillion-dollar insurance "backstop," essentially capping their exposure. By the time this bailout was passed by Congress, there were no widespread economic problems related to terrorism insurance.
The property/casualty insurance industry is accountable to no federal agency, only to weak state agencies. It is subject to virtually no federal regulatory laws, few federal anti-trust laws and no oversight by the Federal Trade Commission. Combine this sorry state of insurance regulation and almost nonexistent data disclosure requirements with the industry's massive political influence - through enormous financial contributions to key lawmakers - and the result is an industry that can make extraordinary claims and demands on U.S. politicians that go nearly unchallenged.
Members of Congress who do support Allstate's move no doubt believe that it's in the best interests of their constituents to bail out this industry. But the hard facts show that the property/casualty insurance industry has made money off tragedies like the hurricane that destroyed the city of New Orleans. Coastal areas in New York should not become the industry's next victims.
Doroshow is executive director of the Center for Justice & Democracy, and Hunter is director of insurance at the Consumer Federation of America.