TorteDeForm

Cyrus Dugger

More on How 2005 Was the Most Profitable Year Ever for the Insurance Industry

The usual narrative of tort “reformers” is that our insurance premiums are increasingly high because of a flood of frivolous lawsuits. As has been said before on Tort Deform, this explanation does not explain the reality of the insurance industry. (2005 Was the Most Profitable Year Ever for the Insurance Industry and nyceve's posts)

Recent news drives this point home even further. It seems increasingly clear that at least a large part of why our insurance premiums cost so much, is simply because the insurance industry is making so much money.

Perhaps if insurance company profits were not as high as they have been, our premiums would not be as high as they have been (Who profits?). Case in point, a recent New York Times article describes the enormous profits made by the insurance industry.

Here are the highlights of the piece:


Insurance companies are expecting record profits in 2006 after predictions of another year of devastating hurricanes have so far come to naught.

Industry experts are estimating that profits may reach $60 billion, on a combination of higher premiums along the coasts, no major payouts for natural disasters and strong investment returns. The insurers also had high profits on other lines of coverage like auto insurance, workers compensation and general liability.

The record profits expected this year come after a terrible 2005, when insurers paid out $61 billion for damage from Hurricane Katrina and other storms. Even so, the insurers ended up with a profit of $43 billion for the year because of exceptionally good results on investments, declining claims on policies on homes away from the coast and profits on other lines of coverage.

The expected record profit this year will add momentum to a decades-long earnings streak, interrupted by only one annual loss — $7 billion in 2001, when the Sept. 11 attacks staggered the insurers.

(link to full article)

Cyrus Dugger: Author Bio | Other Posts
Posted at 12:54 PM, Oct 16, 2006 in Insurance Industry
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Comments

Again, if you really think the problem is that insurance companies charge "too much" and make "too much" money, then the profitable solution is to take advantage of this opportunity and open a competing insurance company that charges less instead of whining about it. (Or, you could use a fraction of the profits to hire a dozen bloggers and thus solve the problem at the same time keeping the whining constant.) The same goes for Eve and her complaints about Blue Cross. The fact that the left spends George Soros's money on political advertising campaigns instead of solving this "problem" shows that the problem isn't what the left claims it is.

ATLA has run insurance companies before. You can see how successful they were at it, and how well their policyholders made out if you look it up.

Posted by: Ted | October 16, 2006 1:50 PM

Hi Ted,

Thanks for your comments on Tort Deform,

Are you saying that 60 billion in profit during the year after Hurricane Katrina is not excessive?

The larger point of this profits critique is that insurance companies complain (as you put it whine) about litigation and blame it for rising premiums. And yet, they have been highly profitable over the last decade.

Moreover, the real source of unnecessary "costs" are the large amount of avoidable medical errors.

As Lee pointed out in his previous post

"Tort reform distracts our attention from preventing needless injuries and deaths. The medical community expressed shock by the 1999 Institute of Medicine report estimating the number of Americans killed each year by medical errors between 44,000 and 98,000. Subsequent estimates are 195,000 unnecessary deaths. Recent news reports estimate over 2,000 British citizens killed each year, and a staggering 525,000 injured. Why are we not outraged by these numbers? Why don't these deaths and injuries command as much political discussion as so called "frivolous lawsuits?" (What is the Problem: Preventable Deaths and Injuries or the Lawsuits That Follow?)(http://www.tortdeform.com/archives/2006/09/what_is_the_problem_to_be_fixe.html)

If you have information which you are going to refer to as to failed insurance companies please provide a link to the readers when you do so that they can readily access it and evaluate your claim

Posted by: Cyrus Dugger | October 16, 2006 2:13 PM

First of all, the medical malpractice insurance industry is a completely different animal than the property insurance industry, which has little to do with liability issues. The majority of doctors are insured by doctor-owned non-profit mutual insurers. So this story has nothing to do with the problems of excessive medical malpractice litigation expense.

Second of all, I assume you and your readers are intelligent to know how to do a google search for ATLA insurance, but, if not, I've been kind enough to do it for you and found, as one of the top links, the post I wrote about the subject. If you're going to talk intelligently in this field, I recommend reading what reformers actually write; I pay the courtesy of checking in to see if anti-reformers have legitimate arguments, even as that repeatedly demonstrates itself to be a fruitless task.

Third of all, you seem not to understand the concept of variance. The service insurers provide is the reduction of economic variance. Thus, because I hold fire insurance, I will not be much worse off in years when I suffer from a fire than in years when I don't. In a year that is so far without (knock on wood) major hurricanes, earthquakes, or terrorist attacks, variance helps insurers, and they are going to have a profitable year: we are luckier than average, but we bought variance reductions and the insurers ended up benefiting. So, no, there's nothing "excessive" about $60 billion in profits in a year when we are fortunate enough not to have such events occur. In a year where we are unfortunate enough to suffer major hurricanes and terrorist attacks, the bad luck will be suffered by insurers instead of their insureds, and they will lose a lot of money, like they did in 2001. Looking at one-year profits is meaningless, because insurers don't look at their profits in one-year increments, and neither do people who intelligently invest in insurers.

How are insurers going to be able to afford to pay claims in the bad years if they don't make profits in the good years?

Posted by: Ted | October 16, 2006 4:14 PM

Hi Ted,

Thanks for your comments on Tort Deform.

The medical and home insurance industries are different, but the critique of the excessive profits is the same. Whether the insurer is complaining about too many lawsuits, too much fraud, or the need to increase premiums because of financially hard times (as are the never ending narratives) these shrill complaints are not based in reality on a real financial danger for these insurance companies.

Obviously, insurance companies need to be profitable over the long run, and so profits in one year are not dispositive as to a conclusion about making too much money (as opposed to no profit at all).

As stated in the above post, the insurance industry at issue there has been increasingly profitable over the last decade. Variance….. variance is awesome, but the 9/11 attacks wrought havoc unparalleled in our nation’s entire history (with the possible exception of Pearl Harbor). It’s hardly a back and fourth good year bad year situation. Moreover, home insurance companies are refusing to re-insure Katrina damaged areas and/or charging cost prohibitive premiums.

Thus, these homeowner insurance companies, like many health insurance companies those who become costly from their insurance coverage because of a hurricane (or in the case of medical insurance a debilitating illness) leaving them high and dry.
(Blue Cross Watch: California Hospitals Being Routinely Defrauded http://www.tortdeform.com/archives/2006/10/blue_cross_watch_california_ho.html)
So, for example it would be great if these homeowner insurance companies could make less each year over the last ten years, but then not charge cost prohibitive rates to those who are trying to rebuild their lives in the wake of Katrina.

This concern is all the more real in light of the fact that that incorrectly denied a large amount of claims, and some whistleblowers have actually left their employment with insurance companies to work for those bringing them to court on behalf of denied policy holders.
Furthermore, you cannot secure a mortgage on your home without homeowners insurance, and thus these policies effectively stop the rebuilding in the region……...but I digress.

I and everybody else who has any type of insurance are definitely for profitable insurance companies which are not teetering on the brink of insolvency and thus at a risk for not being able to reimburse us when we need to actually make a claim for property damages or medical costs. However, there is a happier medium than outrageous profits in light of the premiums currently being charged and the exclusions being made.

Whether or not ATLA succeeded in successfully managing insurance is actually not the point. There are far more established insurance companies which have the sophistication to reduce their profits but still be reasonably profitable. All that I’m saying is that they can do so just making a tad bit less money. I am sure that at least some of them are up to the task of calculating the premiums that they charge as they are able to backdate and enrich their CEO’s and other employees.

NY Times: Chief Executive at Health Insurer Is Forced Out in Options Inquiry

http://www.nytimes.com/2006/10/16/business/16united.html?pagewanted=2&

There are a wide variety of practices which insurance companies often utilize to enable these large profits, detailed in these posts which I see as the source of the outrageous as opposed to reasonable profits which are chronicled in these posts:

The Check is Not in the Mail: Watching Your Medical Costs Go Up
http://www.tortdeform.com/archives/2006/07/the_check_is_not_in_the_mail_w.html

The GAO Report You Will Not See: HSAs "only good for healthy consumers"
http://www.tortdeform.com/archives/2006/09/the_gao_report_you_will_not_se.html

Blue Cross Watch: California Hospitals Being Routinely Defrauded
http://www.tortdeform.com/archives/2006/10/blue_cross_watch_california_ho.html

The Option of Indefinite Denial: NYS Legis. Considers Auto Insurance Nightmare
http://www.tortdeform.com/archives/2006/06/the_option_of_indefinite_denia.html

NY Auto Insurance Nightmare Continues: The Option of Indefinite Denial & Access to Your Med. Insurance
http://www.tortdeform.com/archives/2006/06/ny_auto_insurance_nightmare_co.html

Ted, I am against these profit-oriented practices… are you?

Posted by: Cyrus Dugger | October 16, 2006 5:48 PM

Cyrus, your response ignores the facts and the structure of the insurance industry, and continues to ignore the difference between the economics of the medical malpractice insurance industry and other insurers. In 2003, medical malpractice insurers were paying $1.39 in liability expenses (and that's before administrative expenses) for every $1 in premiums they were taking in. How you can say there aren't real financial issues in medical malpractice insurance is dumbfounding.

You conclude by refusing to answer any of the questions or address any of the points I pose and then change the subject to a third type of insurer that is completely irrelevant to the discussion of medical malpractice and property insurers.

I don't know whether your style reflects dishonest sophism or just a stubborn refusal to try to understand what you're talking about, but it's very sad and inhibits productive discussion.

Moreover, home insurance companies are refusing to re-insure Katrina damaged areas and/or charging cost prohibitive premiums.

So what? If you think you can profitably insure these areas for less, the market is wide open for you to do so. That's the beauty of the free market, something that the trial bar is trying to destroy.

I'm sure you know someone who knows someone who knows George Soros. Make it happen, and you'll both solve a problem and be rich to boot, and able to fund a hundred blogs instead of just the one you write.

Posted by: Ted | October 16, 2006 6:54 PM

Hi Ted,

Thanks for your comments on Tort Deform.

Your representation of my comment above is simply dishonest. As you know, the larger point is about price gouging about all insurance companies.

As to your link to your think tank's paper, there are countless studies which contradict your organizations' findings. Both sides just disagree and can cite to their own studies.

I am not engaging in this mathematical wizardly which both sides of the debate can accomplish by measuring different things in different ways.

Case in point, your organizational ally's "Tort Liability Index"

The Tort Liability Index: Why You Should Feel Free to Ignore It
http://www.tortdeform.com/archives/2006/06/the_tort_liability_index_why_y.html

Fun With Numbers: The Insurance Industry's Phony "Tort Cost" FiguresFun With Numbers: The Insurance Industry's Phony "Tort Cost" Figures
http://www.tortdeform.com/archives/2006/09/fun_with_numbers_the_insurance.html

And making a different but interesting point,
The Tort Liability Index: Another Reason Why You Should Feel Free to Ignore It

http://www.tortdeform.com/archives/2006/07/the_tort_liability_index_anoth.html


What I am saying is that....

a) The insurance industry generally, and specifically here as to homeowners' insurance, make more profit (as chronicled above)than seems fair given their complaints about "pervasive" lawsuits and fraud, and the high price of their premiums.

b) They often deny claims to make more money.

Do you disagree with these two points?

Posted by: Cyrus Dugger | October 16, 2006 7:24 PM

Really, Cyrus? What study doesn't know how to calculate a loss ratio? There aren't "different ways" to measure a loss ratio. There's one way, one numerator, and one denominator. There are, no doubt, dishonest reports that ignore the loss ratio (except for Tom Baker, I've never seen an anti-reformer acknowledge its existence, but Baker's position is at least an internally honest one by arguing that insurance rates should be higher to reflect what he views are the greater costs of malpractice), but there are none that I am aware of that claim it isn't what it is.

In short, faced with an unpleasant fact that refutes the argument you make, you (1) pretend it doesn't exist by inventing a non-existent excuse for ignoring it; (2) pretend you didn't claim in your post and 10/16 2:13 PM comment that you were talking about medical malpractice insurers using property insurer profits; and (3) once again attempt to change the subject to something completely irrelevant to your misrepresentations.

Why should I begin to think that you're interested in honest discussion of the issues when you invariably attempt to change the subject as soon as you're engaged and refuted?

Posted by: Ted | October 18, 2006 9:53 PM

Hi Ted,

Thanks for your comments on Tort Deform,

It’s been a long time since you were here, welcome back.
First of all, below are the links to the Center for Justice and Democracy studies which respond to your view. I won’t take the time to repeat their response to you critique since the person who wrote the original study and the rebuttal is highly qualified as a former Federal Insurance Administrator under Presidents Ford and Carter as the former Texas Insurance Commissioner.

Here is the link to the rebuttal to your think tank’s understanding of medical malpractice insurance issues.

http://www.insurance-reform.org/StableLosses04.pdf

And here is the response to your critique of that first piece.

“American Enterprise Institute Medical Malpractice Report Based on Fundamental Misunderstanding of Insurance Markets”

http://www.insurance-reform.org/pr/AEIMedMalReport.pdf
A couple of small points:

1) In our discussions I have always admitted when I thought that you had an arguable point, this is simply not such a case.

2) As to avoiding discussion, I am waiting for weeks now to hear your response to my question regarding whether or not you feel the worker’s compensation system treated and/or is treating the 911 Ground Zero workers fairly. Do you think it did. You consistently cherry pick the issues you comment on or continue discussion on here over at Tort Deform, which is your right as commentator, but let’s just be honest about that in our back and fourth

To respond,

Isn’t the loss ratio itself a deceptive number? Can you explain to those readers who are not familiar what the numerator and denominator actually are when calculating the loss ratio?

Above you said:

“In 2003, medical malpractice insurers were paying $1.39 in liability expenses (and that's before administrative expenses) for every $1 in premiums they were taking in. How you can say there aren't real financial issues in medical malpractice insurance is dumbfounding.”

First of all, there’s no footnote for this statistic which you cite to in the report you link us to.

Where’s your source for this number?

But in any event, if you’re saying here that medical malpractice insurance companies are paying too much in litigation costs, couldn’t one solution be to pay and not litigate as many claims?

Moreover, the hard truth is that as demonstrated by the above studies and those that I will soon post, the biggest factor in medical malpractice insurance premiums is the market and not caps or the number of lawsuits.

What do medical malpractice insurance companies do with the premiums they take it?

Well, obviously they invest it, and so their investments’ successes are heavily tied to the market – this is why medical malpractice insurers insure greater risk policy in good economic times – because they make so much money off of their investments when times are good that they still make a lot of money with higher risk policies.

Ted, is it possible that insurance companies have had to increase premiums because of bad investments?

Can you concede that this might have even just some effect? Even just a little?

Posted by: Cyrus Dugger | October 23, 2006 9:45 AM

Hi Ted,

Another question I'm interested in is what your views are on the insurance practices I highlighted in my comments above.

Do you dispute that these tactics are used by insurance companies? If not how can you defend insurance companies' conduct?

Can you defend the work behind and promotion of the "Tort Liability Index"?

Posted by: Cyrus Dugger | October 23, 2006 9:59 AM

To answer my own question above:

"Ted, is it possible that insurance companies have had to increase premiums because of bad investments?

Can you concede that this might have even just some effect? Even just a little?"

I give our readers this overview of some examples.

Medical Malpractice Mismanagement –
Why Some Major Insurers Have Pulled Out of the Market

http://centerjd.org/private/mythbuster/medmalmismanagement.pdf

Posted by: Cyrus Dugger | October 23, 2006 2:14 PM

"Ted, is it possible that insurance companies have had to increase premiums because of bad investments?

"Can you concede that this might have even just some effect? Even just a little?"

This is evidence, at least, that you either did not read or did not understand what I wrote, since Martin and I made our position quite clear on that issue.

If one compares the AIR "response" to the AEI report, you'll see that they dodge the relevant issues. But you have to read the AEI report first.

"First of all, there’s no footnote for this [combined ratio] statistic which you cite to in the report you link us to."

Cyrus, when you say something like this, when the source is right there in Table One, I don't know whether you're dishonest, illiterate, or just aren't bothering to read what reformers say, but I don't see why it's worth discussing this (or anything else) with you in any of those scenarios.

Posted by: Ted | October 25, 2006 11:22 AM

Hi Ted,

Thanks for your comment on Tort Deform.

Ted, we can all do without your pejorative statements. This space is not the third grade playground.

Just make your arguments, if they are strong they will stand on their own merit.

My response to your substantive points follow below.

Posted by: Cyrus Dugger | October 25, 2006 12:17 PM

Ted,

First of all, we seem to be in the habit of talking past each other. Let's fix that from now on and pledge (we can even put an official start date of today 10/25/2006 @ 12:39 pm) to always address every point brought up by the other side.

This string is hopelessly unable to accomplish that goal as this post has so many ignored points and questions that it is hopeless to salvage.

As to your footnote and source, there is no footnote directly following your stat.

I was dumbfounded as to where you found support for this and went to the language, although there is a table later on which you provide this source, this is just not the same as providing a footnote directly after your sentence.

I wish our discussion could be less annoying than arguing about footnotes, but like you I'm a busy guy and searched for a footnote where it should be and then had to move on with my day.

Instead of responding to what was really unnecessarily pejorative response (and Ted these really do have to stop if you wish to continue commenting here) to somebody who simply differes in opinion from you, why don't you explain it to me and all the readers here. Your report is long and readers are unlikly to wade through it.

So....as I asked before.

"Can you concede that bad business investments might have even just some effect? Even just a little?"

You argue (below) that there is not really a soft hard market cycle, but I am still unclear if you think that bad investments also ultimately affect insurance premiums...at all.

"But now, according to AIR, the malpractice crisis will be over when the cycle is stabilized, arguing that the cycle is not caused by lawsuits, but by some external insurance market peculiarity. Therefore, AIR asks us to conclude that liability reform was a waste, as the insurance market will come back by itself. Again, this argument avoids the litigation and judicial-behavior side of the equation. It also avoids the state of the state malpractice insurance markets.

The problem with AIR’s hypothesis is that an insurance cycle is not really a cycle at all, but rather a reaction to unpredictable shocks.[26] While we have had three shocks that correspond to the malpractice crises of the past, the industry has returned to some level of “profitability and stability” after the effects of the shock have worn off. The question that needs to be addressed is whether this a fragile stability or something more permanent."

Posted by: Cyrus Dugger | October 25, 2006 12:57 PM

To All,

Here is some more recent info...

http://www.insurance-reform.org/AIRSoftMarketProfits.pdf

FOR IMMEDIATE RELEASE: CONTACT: J. Robert Hunter, 703-528-0062
October 25, 2006 Joanne Doroshow, 212-267-2801
COMMERCIAL INSURANCE RATES CONTINUE TO FALL
WHILE INSURER PROFITS SKYROCKET TO RECORD LEVELS
NEW YORK — The latest industry data provide continuing evidence that the skyrocketing insurance
rates of 2000 to 2003 have led to record industry profits but commercial insurance rates have stabilized
or dropped in almost every sector, including medical malpractice. According to J. Robert Hunter,
Director of Insurance for the Consumer Federation of America, co-founder of Americans for Insurance
Reform and former Texas Insurance Commissioner and Federal Insurance Administrator, “this drop in
prices has been underway for three years as the country experiences a sustained soft market.”
The current soft market (falling rates) follows a hard market (large price hikes) that hit most lines of
insurance in the early 2000s, particularly medical malpractice. Said Hunter, “It now appears clear that
the industry’s record profits in 2004 and 2005, and the exceptional record profit about to be reported
for 2006, are due in large part to the years of huge rate hikes in the earlier part of the decade, which
were not caused by any accompanying increase in claims or payouts. In fact, inflation-adjusted payouts
and claims never increased at all during this period. Rather, this is all part of a well-documented
cyclical phenomenon for the property/casualty insurance industry.”

Posted by: Cyrus Dugger | October 25, 2006 1:01 PM

Cyrus: I'm not being pejorative, though your blog certainly has been. I'm pointing out a simple fact: I specifically addressed the question of to what extent investment performance is responsible for medical malpractice insurance rates. You posted three comments, none of which address what I wrote. There are three possibilities:

1) You haven't bothered to read the entire piece, though it's only 5000 words, but you feel free to criticize something you haven't read.
2) You did read it, but aren't able to understand it.
3) You did read it and did understand it, but are dishonestly refusing to address the argument.

If there's a fourth reason for why you continue to fail to address what I actually said, please provide it.

We're talking about medical malpractice insurance rates, and you raise the issue of commerical insurance profits. Again, there are three possibilities:

1) You didn't read my comment that the latter is irrelevant to the former.
2) You did read my comment that the latter is irrelevant to the former, but don't understand the difference.
3) You did read and understand my comment that commercial insurance profits are irrelevant to medical malpractice rates, but are dishonestly refusing to address the argument and again attempting to change the subject.

If it's #1, then there is no point in responding because you're not going to read what I write in response.

If it's #2, then there is no point in responding because I'm debating a sock puppet incapable of understanding the issues involved, as apparently happened here, because you can't possibly honestly believe that the AIR response is actually responsive any more than you can possibly believe that ATLA's personal attacks were responsive to my op-ed.

And if it's #3, then there is no point in responding because you're not interested in honest discussion.

I'm open to a possibility that I haven't considered. But I'd expect an explanation why you think it's worth my time to continue this discussion when you steadfastly fail to address anything I say or the underlying evidence for it.

In my mind, I've wasted far too much time here. I have real writing to do.

Posted by: Ted | October 25, 2006 3:59 PM

I'm sorry Ted,

This discussion has gotten ridiculous.

I just can't engage in this type of mean-spirited fruitless discussion with you.

Indeed, I hope that we both have better things to do with our day.

Best of luck!

Posted by: Cyrus Dugger | October 25, 2006 4:41 PM

Why is it a problem if insurance companies are profitable?

If they are falsely claiming poverty for some political purpose, why condemn their profitability rather than their false claims of poverty?

Posted by: bob montgomery | October 27, 2006 1:56 PM

"I'm sorry Ted,

This discussion has gotten ridiculous.

I just can't engage in this type of mean-spirited fruitless discussion with you.

Indeed, I hope that we both have better things to do with our day.

Best of luck!"

==================================================
Or, in plain English:

"I don't like what you said so I'm gonna take my ball and go home and tell my Daddy/Mommy on you!!! WAAAAAHHHH!!"

Cyrus, GROW UP. You couldn't answer Ted's points without going off in a completely different direction; following what passed for your argument was like trying to find one's way through the L.A. freeway system or London's street system. (Having lived in both places, I know of what I speak!) When reading your responses (?), I felt like I was reading two or three different threads at the same time, none of which related to Ted's original thread.

BTW, one point that Ted's thread missed--and yours did across the board--was that the profits were for THE ENTIRE INDUSTRY, not for individual companies (some of which DID take a huge hit in 2005). The argument that profits were "excessive" depends on which company you ask after, as well as what type of insurance is involved. (I.e. a good guess was that fire claims may be lower in 2004 due to the multiple storms, not just Katrina and Rita, that year AND in 2003 along the Gulf coast from Texas to Florida. So, a company who didn't get hit for
fire damages made profit off THAT, but may have lost when it came to, say, auto insurance or homeowners' insurance.)

Posted by: Melvin H. | October 27, 2006 2:11 PM