Alternet has an article up taking the insurance industry to task over mishandling of Katrina claims and other alleged shenanigans.
The first part of the article is a slamming of State Farm’s alleged over-exuberance in using the flood exclusion in its homeowners policies. The criticism here seems fair, if State Farm actually did what they are accused of doing.
However, the article then goes into a larger rant against the industry. For example:
Meanwhile, insurers pulled policies on the Gulf and Atlantic coasts, increased deductibles and premiums, jacked up rates for late payments and piled more risk on customers. State regulators allowed this because insurance companies moaned that reinsurance companies (which insure insurers but have zero responsibility to consumers) doubled their premiums and they need to share the cost.[.]
The result is that a disaster in 2006 or later will hit policyholders with greater losses than last year. Meanwhile, insurance company profits have nearly doubled, from $22 billion to $43 billion, in the past six years. Even with Katrina, the industry posted its largest surplus in 2005.
I suspect the author would not be overly sympathetic to a discussion about the insurance market cycle. Six years ago, large swaths of the market were inadequately priced, and returns for insurers were abysmal as compared to other companies bearing similar risk.
Washington, D.C., attorney Pamela B. Stuart, who grew up in Garden City, has a place in Vero Beach, Fla. Her premiums jumped from $1,300 to $3,000 in the past two years. She battles insurance companies for consumers and has helped neighbors decipher their policies. “I spent years as a defense lawyer. For a layperson, though, reading them is painful,” she says.
Enter federal intervention. In June, Sens. Lott and Mark Dayton (D-Minn.) proposed the “Honesty is the Best Insurance Policy” bill, which would force insurers to write policies in plain English. The bill has an uphill climb, given the power of the insurance lobby
It should be noted, however, that in many (most?) states, there are laws and regulations already on the books governing the readability of insurance contract language in personal lines. I’m not sure that a federal “plain English” law would improve matters significantly, given that part of the challenge is the complexity of the insurance product itself.
Other problems linger. A glaring one in the Katrina suits is what constitutes wind damage versus flood damage. Blaming floods is the industry’s “get out of payment free” card. But for the decimated coastal homes, it’s a seismic leap to proclaim the cause was spontaneous flood, rather than wind-caused storm surge.
This is where the phrase “Read The Fine Policy” comes into play. “Flood” is shorthand for a class of perils for which coverage is not provided. Industry-standard language in homeowners policies excludes loss from “flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind”. (Language is copyrighted by ISO, BTW, and is used under fair use.)
That isn’t to say that some agents perhaps could have done better in counseling their customers about what coverage they needed, or that FEMA could have been more dilligent with their flood zone maps, or.. However, it should be clear in the default circumstances that storm surge (waves or tidal water, whether or not driven by wind) isn’t covered.
That’s part of insurance 101. Perhaps we need to include a module on auto, renters, and homeowners insurance as part of the curricula of basic-level economics, in much the same way that balancing a checkbook, preparing a budget, and filling out a tax form is?
Another dilemma is the lack of federal oversight of the industry, leaving states hostage to insurers. While many insurers pulled coverage from Louisiana, Alabama and Florida, remaining ones hiked premiums. When Mississippi Attorney General Jim Hood commenced investigations after Katrina, insurance firms threatened to bolt.
It’s one thing when a major senator has his house blown down and instigates necessary legislation. But, for lasting reform, we need more federal and state supervision and fewer leniencies with reinsurance and insurance company price hikes and reneged claims.
I think the author is unaware of discussion on Capitol Hill about creating a federal regulatory structure for insurance, modeled on the dual federal-state regulation of banks. Given how lightly the Comptroller of the Treasury regulates federally chartered banks, I’m not sure that the alternet writer would find federal regulation the best option.
Besides, if you’d like to see the impact of “more regulation”, check out the situation in Massachusetts, or how median auto insurance rates have dropped as the yoke of overregulation in New Jersey has been lifted, and carriers have willingly entered that market.
I don’t doubt that there is some overreaction taking place in property insurance and reinsurance pricing these days. That’s in no small part due to the psychological impact of having two unprecedented cat seasons back-to-back, insurance company management actually taking a look at what the aggregations of their exposure could mean under disaster scenarios, and inefficiencies in the market.
I don’t think that adding additional inefficiency in the form of extra regulation will help matters significantly.