Here we go again.
From the AP wire:
The Consumer Federation of America’s insurance director, J. Robert Hunter, said insurance companies have enjoyed robust profits and contained losses largely by “methodically overcharging consumers, cutting back on coverage, underpaying claims and getting taxpayers to pick up some of the tab for risks the insurers should cover.”
Hunter’s comments came with the release of a study by Consumer Federation, Consumers Union and several other consumer organizations that said the industry’s overcharges reached an average $870 per U.S. household over the last four years.
An Insurance Journal article on the subject adds:
Finally, the CFA says insurer profits are higher than they need to be. It estimates that after-tax returns for 2007 are about $65 billion, just under the record level set in 2006. In 2007, the study estimates that stock insurers will earn a return on equity (ROE) of more than 19 percent, well in excess of what is required by investors. It claims that the lower industry-wide ROE of 7.6 percent that insurers report underestimates the industry’s actual ROE.
The IJ article offers an industry rebuttal, the gist of which is that the CFA is using an apples-and-oranges comparison, criticizing insurers for their practices in personal lines insurance, when looking at ROE’s inflated by workers comp and other long-tailed lines…and oh, by the way, they made an accounting error in their number-crunching which magnifies the “problem”.
I can’t comment on the accounting error argument…but when it comes to personal lines, I can point out that the near-commodity nature of the business means that if a consumer thinks they’re paying too much for too little coverage, the odds are they’ll be able to find a better price in the market from a different carrier…provided sufficient capacity exists in the market.
And what’s the best way to ensure capacity? Give capital providers an opportunity to earn returns comparable to the risk faced.
You’d think that if a consumer group were really concerned about excess profits in the insurance industry, they’d invest in insurance companies…and then use their share of those excess profits to subsidize the rates of their constituents.