Kia Franklin

Insurers Cheat Victims-Record Highest Profits Ever

From InjuryBoard.Com:

Anyone who believes the propaganda from the insurance industry and US Chamber of Commerce about trial lawyers driving insurers out of business should read the excellent article posted October 15 on about home insurers cheating victims while recording record profits. This article shows that the tort reform movement is a fraud. Even in the wake of Hurricane Katrina, property-casualty insurers, which cover damage to homes and cars, reported their highest-ever profit of $73 BILLION last year. (Keep Reading)

The author asks: "How on earth did our Chamber of Commerce get to the point where its primary purpose is to attack the public's constitutional right to trial by jury?" For starters, check out The Powell Memorandum, an advocacy/strategy peice urging the Chamber to trumpet business interests at all costs. It appears that the Chamber, 36 years later, has really responded to that call.

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Posted at 2:25 PM, Oct 19, 2007 in Hurricane Katrina | Insurance Industry
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I know this has been pointed out many times in the comments, but it appears not to have sunk in. State Farm, one of the two companies mentioned in the article, is a mutual insurance company. Mutual insurance companies cannot make a profit! Any extra money a mutual company makes is distributed back to policyholders. If, in fact, State Farm is ripping off some subset of its policyholders it is to benefit other State Farm policyholders. The tort reform movement may very well be a fraud, but for this post to be any better it should be updated to point out that folks at don't have a clue as to what they are talking about.

Posted by: Drew Drytellar | October 19, 2007 6:54 PM

I am not convinced the folks that run this site know what they are talking about either

The purpose of ANY business endeavor is to make money - certainly all of the "white knight" plaintiff firms worshiped by this site are getting their 33%/40% of the action or huge hourly fees.

Do huge contingency fee awards and class action law suit fees "cheat" their customers, the victims and the public in general? Of course they do and to a far greater extent that the insurance companies do. Do you hear any of these alleged civil justic/public interest sites screaming for regulation of legal fees? Of course not, since they are mostly trial lawyer fronts.

This site whoever, has yet to run a headline such as "Another class action class shafted by its attorneys excessive fees". It never will - this site is truly, as Walter Olson refers to it, the "Bizaro Overlawyered" site

Posted by: Paul W Dennis | October 20, 2007 9:31 AM

There is a misconception that the insurance industry wants tort reform. The insurnace industry and the industry of tort law are mutually beneficial to each other. The threat of high payouts in tort cases allows the insurers to raise their rates. This results in increased proffits over the long haul for both. The people who want tort reform are those who are paying insurance premiums and those who can lose their own assets that are not protected by insurance or the law.

Mutual insurance companies play both sides. The more money they make on interest can lead to a reduction of overall premiums but they still face the increasing threat of huge tort payouts.

Remember, insurance companies do good when the stock market is good. Why, because they are holding everybodies money and get the interest. Tie all the money up in court and guess who makes more?

Posted by: throckmorton | October 22, 2007 8:29 AM

Okay, nearly a week has passed and yet this post is unchanged. Perhaps the point went unnoticed, so let me repeat it: mutual insurance companies do not make profits. Money they charge in excess of claims and fees is distributed back to policyholders. The accounting is different, but they do not make any more money than the Red Cross, the United Way or any other non-profit organization. The author of the article you cite does not appear to be aware of this fact. Note that this is not an opinion, it's a fact. It's even been mentioned many times on the message boards of this website. For the sake of your credibility, I'd either take down this post or change it to say that while you agree with the sentiments expressed by this blogger, he is not very well informed on matters of insurance and law.

Posted by: Drew Drytellar | October 25, 2007 10:50 PM

This is the first I've heard of a direct challenge to the very existence of all the profits that various
news sources, research studies, and even insurance trade groups themselves are reporting. Any resources you can direct our way are appreciated.

Congress' bi-partisan legislation to combat anti-competitive prices in the insurance industry, the Insurance Industry Competition Act seems to agree that the insurance industry is making a profit off of the people, and in the intro to the bill Senator Leahy also references a report on the issue.

Then there's the question of Allstate, not a mutual insurance co., and how its practices and those of mutual insurance co's like Statefarm compare. What's for sure is that consumers are getting shafted, their claims are being illegitimately denied or unreasonably delayed, and while they're trying to straighten the mess out, the insurance companies are reporting increased profits.

Posted by: Kia | October 26, 2007 2:43 PM

"Direct challenge to all the profits"? I think I'm having trouble making myself clear. The article cited claims that the insurance industry made $73 billion in profits and this is excessive due to the greedy practices of companies like Allstate and State Farm. Whatever the merits of the charges against Allstate, saying this about State Farm is nonsensical. State Farm is a mutual and mutual companies do not make a profit. I can suggest more in depth references if you like, but Wikipedia should give you the general idea.( and Not all insurers are mutuals and many--like Allstate--do make profits (or, in some years, losses). Reasonable people can differ as to whether or not those profits are excessive. Those are matters of opinion. That mutual insurers don't make a profit is a fact. I would again suggest updating your post to say something along the lines of "although we agree with the sentiments expressed in this article, the writer is ignorant of some the basic facets of insurance and law."

Now, in response to your links:
1) LA Times: Yes it is true that stock insurers made record profits in 2005 and 2006. As with the mutuals, some basic insurance knowledge can come in handy here too. Historically, the years that stock insurers lose money can cancel out years of profit. Hurricane Andrew, for instance, cost more than all homeowners insurance premiums EVER collected in Florida. Note that I'm not saying those profits are or are not excessive, but any profit numbers from just two years should be taken with a grain of salt. Even a single event can alter everything. Second off, given this risk (how many people want an investment that can disappear overnight?), those who invest in insurance companies generally expect to be compensated for the risk they take. How much is fair compensation? I have no idea, but given that a big problem cited in this article is lack of coverage, quite a bit. Finally, regulators deciding what is a fair profit is an issue somewhat unique to insurance. Let me ask you--I'm genuinely curious here--do you believe that insurance companies should be unique in this regard? Put differently, should the government be able to step in and prevent excessive profit at, say, a retailer? A restaurant? A law firm?
2)CenterJD--it appears the issue they are discussing (though they don't phrase it this way) is not excessive profit, but inadequate redistribution of premiums from elsewhere in the country to areas affected by Katrina. It may seem trivial to note (though this paper does not) that insurance companies spent way more on those who bought policies along the gulf coast than those folks paid in. This is as true if the company is a profit-seeking seeking stock insurer as it is when it is a profitless mutual. One can talk about how much it would be fair to give the storm victim, but make no mistake as to where it is coming from--other policyholders. Another question--if you were to run a mutual insurance companies how much would you charge coastal residents relative to non-coastal residents?
3) The Leahy Bill--another little known fact--many (most? all?)large insurance companies would benefit tremendously from the removal of this antitrust exemption. The McCarran Ferguson act--the law being repealed here--is a partial antitrust exemption that allows insurance companies to pool data for the purposes of more accurate risk calculation. It is mostly of benefit to small insurance companies that don't have the data to figure this out on their own. It is mostly irrelevant to a big insurer like Allstate or State Farm. If companies were to be forbidden to pool data, every small p&c insurer in the country would go out of business and the big ones (like Allstate and State Farm) would be able to share the spoils.
All the best and to bed with me!

Posted by: Drew Drytellar | October 26, 2007 11:11 PM

State Farm doesn't make any profits?!?!? State Farm has billions and billions of dollars and they nickel and dime consumers every chance they get. Listen to what Kia is saying--no company with that much money could not make a profit.

Posted by: Joe Schmo | October 31, 2007 12:44 AM

Schmo--yes they do have a lot of money, but mutual insurance companies don't make a profit. It's an insurance 101 fact. There is no argument on that. I'm not sure if she's dishonest or just poorly informed, but Kia is just plain wrong here.

Posted by: Drew Drytellar | November 4, 2007 12:25 PM

Drew, I assure you that I'm neither, although I'm not certain that that will dissuade you from jumping to personal attacks on my honesty or intelligence in the future.

That aside, and the fact that I didn't write the article but merely pointed it out as an interesting analysis notwithstanding, the article is not "just plain wrong" as you say.

You say that it is a fact that mutual insurance companies don't make a profit. Actually, they are not profit *centric* or profit obsessed, but this doens't mean that they don't make profits. I'm not a big fan of wikipedia as a primary source since its user generated but I'd love to see something from State Farm contesting all that's been said abou their profits in the media. I'll gladly agree with you at that point.

But as you admit, Allstate still escapes your critique, which again demonstrates that the article is not "just plain wrong." If your point about mutual insurance stands, it still doesn't take away from the fact that insurers are cheating victims while profiting off of their breach of contract with their customers. This is now an established fact--not a matter of opinion. It is not a matter of opinion that their profits were excessive when you see record premiums, record profits, and a slew of reports about non-payment for claims (and not just the wind/water confusion, which itself leaves room for critique) that policyholders thought were covered.

Assuming your "insurance 101" were correct, I'd suggest contacting the research groups and media outlets that have covered this as well as the insurance industry execs who've mentioned these record-breaking profits and who've been quoted in those groups' publications. Because I'm certainly not alone in recognizing and calling to attention the fact that there are shady practices going on in the insurance industry, but that meanwhile insurance co's are trying to pass the blame (but not the bucks).

There's even been recent legislation around the problem that was in many ways a response to the horrors of Katrina insurance stuff. But I guess Senator Leahy's misinformed and dishonest too?

Posted by: Kia | November 5, 2007 7:11 PM

Your debate about whether mutual (as opposed to capital stock) insurance companies make a profit is perhaps lacking on an issue of semantics.

As an attorney for over three decades, I had the privilege of getting to learn from some of the best. My most money-making clients consistently did business as “non-profit” foundations, corporations, institutes, etc. Any money that would have otherwise gone to pay dividends as “profit” got consumed in paying extraordinary salaries and perks to themselves. This is an important point in examining any mutual insurance company for one significant reason. Mutual insurance companies do not owe to their policyholders the same fiduciary duties a stock company owes to its shareholders. In short, mutual companies are not a risk of being sued by shareholders suits for what would normally amount to corporate mismanagement, excessive executive compensation packages, self-dealing, etc.

In the case of insurance companies, it is important to note that their business model is fundamentally flawed. With a few exceptions (like typical worker’s compensation insurance), insurance is (I think?) the only industry where the seller doesn’t have a clue as to the cost of his goods/services sold until long after the price has been set and paid. That is, a premium is charged and paid in exchange for specified insurance coverage. The insurance company can not ascertain how much it is going to have to spend on that insured/coverage until the very last day the last possible statute of limitations has run.

In times of little or extremely slow change, a premium could be reasonably guessed at through established actuarial practices. With the advent of “decentralization from computerization” (among other reasons), there is now such rapid change that insurance companies can no longer predict their losses with sufficient certainty to guarantee “premium profitability”. In short, if they kept their promises to their insureds, they would go broke. This has lead to the practice of excessive denials of coverage, overly aggressive coverage defenses, dishonest claims practices, and a host of unfair business practices in addition to stockpiling excessive revenues whenever the opportunity presents itself.

Posted by: Joe Reisinger | November 11, 2007 3:26 PM