Yesterday, Americans for Insurance Reform released an important report on the insurance industry entitled “Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America.” The lengthy report, based on a study of permissive regulatory environments, decades of industry financial data, and candid quotations from industry and public officials, offers another strong refutation of “tort reform” talking points by shedding much-needed light on the true reasons for the rise and fall of insurance rates.
Industry lobbyists rarely fail to blame liability insurance “crises” for periodic premium rate increases, and almost invariably proceed to lobby Congress and state legislatures to enact “tort reform” measures, which would make it more difficult for everyday Americans to obtain compensation when injured. This new report convincingly refutes that argument, and instead demonstrates that the particularities of the insurance industry and the lax regulatory environment contribute to this cycle of “hard” and “soft” insurance markets.
As the report lays out in great detail, the property/casualty insurance industry does not generally make its profits as one might expect – from charging more in premiums than it pays out in compensation. Rather, profits stem largely from using the money paid in premiums and investing it in securities. Indeed, insurance companies almost always pay out more in compensation than they take in through premiums, because they can make up the difference in the interim through investment. Profit is made, therefore, primarily by getting more premium dollars to invest. For this reason, during “soft” market periods, which are typical, insurance companies compete heavily for premiums to invest, often comparatively underpricing policies to obtain money to invest.
But when a “hard” market arrives, when investments underperform, or when price competition on premium rates cuts into investment profits, insurance companies point not to their own mismanagement, but to the lack of “tort reform” as the core problem. Insurance companies, who are statutorily exempt from federal antitrust laws, then collude in hiking prices and cutting coverage, and can point to their “underwriting losses” to impel legislative action.
This report comes at a time when the insurance market is poised to enter a “hard” phase, and we can expect insurance companies to press for laws that restrict consumer rights. It is important to be ready to answer these spurious claims, and Americans for Insurance Reform has done the public a great service in issuing this report.