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home / insurance / in the media
Jan 07, 2003
by LUKE METZGER & DAVID BRADLEY
Op-ed: Insurance industry gambled our money and lostInsurance on your car or home is supposed to provide some security that if something goes wrong, it can't go too wrong. Unfortunately, things have been going very wrong for too many Texas families.
The cost of homeowner's insurance in Texas was already higher than anywhere else in the nation even before disaster started to strike those who drive a car or live in their own home. Over the last few years, insurance companies have been drastically increasing rates on homeowners, canceling policies, reducing coverage and prying into private credit records to keep coverage from many Texans. The problems of mold and extreme weather have contributed to the increases, but these factors alone do not go far enough in explaining the exorbitant rate increases. Why such high rates, then?
Policyholders pay premiums to insurance companies to reduce their risk in case disaster or an accident strikes. Insurers thus have a great responsibility to manage our money prudently to make sure they can meet their contractual liabilities to compensate policyholders.
Unfortunately, in recent years, insurance companies got greedy. The lure of the stock market bubble convinced insurance companies to ignore industry standards that call for conservative investment strategies. Typically, insurance companies ensure that their portfolios are invested in municipal and government bonds, with only limited involvement in the risky stock market. In the 1990s, however, insurance companies increasingly put both our premiums and the money reserved to pay losses into higher risk stock investments. And you know the rest of the story.
The stock market burst and the insurance industry lost billions of dollars of our premiums. Dr. John Wilson, a Washington, D.C.-based economic consultant and insurance industry expert, estimates that insurance industry's stock portfolios lost a total of nearly $20 billion. According to a recent report by the Foundation for Taxpayer and Consumer Rights that looks at some of the investments by big insurance companies, in 2001, Farmers Insurance lost $9 million from investments in Enron and $1.1 million in Dynegy investments. State Farm lost $13.5 million in Enron, $42.6 million in Tellabs and $55 million in Level 3 Communications. And in 2002 the state's largest insurers kept losing with investments in Qwest, WorldCom and Honeywell.
When the investments were going well, the insurance companies didn't lower our rates or give us rebates, but now that their trip to Vegas didn't pay off, they want us to foot the bill. We wouldn't accept this from a bank, so why should we from an insurance company?
The outrage doesn't end here though. Rather than recouping their losses over a long period of time, the insurance industry plan was to make us pay for it all right up front. Texas homeowners saw their rates jump as much as 200 percent. Insurance companies were able to raise rates so dramatically because of loopholes in the law that allow them to shift policyholders into unregulated affiliates to escape rate regulation. Ninety-five percent of Texas homeowners now have their policies in these unregulated markets.
A lot of promises and big talk were made during the elections, and with the Legislature starting this month, our decision-makers have the opportunity to make the rhetoric real. We need some hard work in Austin to stop insurance companies from passing the results of their reckless investment behavior on to their policyholders. Unfortunately, the insurance industry spent more than $600,000 in campaign contributions in the last election cycle in order to convince the Legislature to decrease regulation of the industry!
The industry and some legislators are backing a "file and use" system where insurers would file their rates with the Texas Department of Insurance, and then the burden of proof would be on the department to make the case against rate increases. They would have only 60 days to gather information that insurers fiercely protect. The understaffed, underfunded department would be virtually powerless to prevent unfair rate increases from the more than 200 insurers in Texas. This insurance-industry devised scheme leaves the foxes in charge of the hen house and should be emphatically rejected.
A better solution would be to simply close the loopholes that allow the industry to welsh on its bets. Also, if a company wants to exceed insurance department-regulated rates, then the insurance company should be required to make that case. The burden shouldn't fall on the Department of Insurance.
Legislators should also ensure fair underwriting practices, require prompt and fair claims handling practices and ensure access to and availability of real choices and quality insurance products.
It's time to end the roller coaster ride insurance companies have put us on and time to make insurance rates affordable again.
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