Insurers blame high housing costs

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  • | 12:00 p.m. February 13, 2003
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by Susan Romero

Inman News Features  

Insurance companies are creating an “Enron-style insurance crisis” by restricting the supply of homeowner’s insurance so they can increase premiums to “exorbitant levels,” according to the Foundation for Taxpayer and Consumer Rights. The group spearheaded by tax revolt activist Harvey Rosenfield presented that case in testimony before the California state Senate Insurance Commission.

The taxpayer advocacy group said insurance companies are “reeling from massive investment losses sustained in the wake of corporate collapses and the recession” and argued that the government should “use all options—including regulation, litigation and legislation—to reign in the insurance industry and protect consumers from insurance company abuse.”

Real estate agents and home buyers have reported that homeowner’s insurance is becoming increasingly scarce and more costly. But insurers say plenty of policies are available and rising premiums are simply the result of higher home valuations and other normal underwriting factors.

“If you want to get down to dollars and cents in the real estate market, the question is: ‘Are we in a real estate bubble right now?’ Not ‘Is homeowners insurance overpriced?’” said Bob Hartwig, chief economist of the Insurance Information Institute, a non-profit organization supported by property-and-casualty insurance companies.

His argument is supported by an I.I.I. report, “2002/2003 Outlook for Auto and Homeowners Insurance Rates,” which stated: “Every homeowner knows home repairs don’t come cheap and home repair and rebuilding costs continue to rise. This phenomenon is a major driver behind rising homeowner’s insurance rates today.”

He said accusations that the industry invested unwisely in the stock market and now is gouging homeowners to recoup its losses just aren’t true.

“Any accusation that (the industry) has somehow made reckless investments is utterly preposterous and does not stand up to truth,” he said.

Insurers in the last decade paid out $1.18 in losses and expenses for every $1 they earned in premiums, and last year they paid out $8.9 billion more in losses and expenses than they earned in premiums, according to the I.I.I. report. The gap between costs and earnings made last year the second worst on record for the industry.

The worst year was 1992, when insurers lost more than $11 billion due largely to property damage caused by Hurricane Andrew.

Hartwig conceded that such states as California, Florida and Texas are having insurance availability issues, which he said are due primarily to the cost of mold-related claims. Mold repairs cost Texas insurers more than $850 million last year compared with “virtually nothing just a few years earlier,” according to the I.I.I. report.

But Hartwig insisted those states are isolated instances and there is no nationwide shortage of affordable homeowner’s insurance.

“This year homeownership rates in this country reached an all time high of 68 percent. You cannot get a home without homeowner’s insurance so, de facto, homeowner’s insurance is more available than it’s ever been,” he said.

Stories about 50 percent rate increases are “anecdotes” relevant only to states experiencing too many water damage and mold claims or where geography places houses directly in the path of such inevitable weather-related problems as hurricanes, he said.

“When you look at the insurance industry’s statistics for 2002, which will be available in the middle of the year, they will not show 50 percent more premiums in homeowner’s insurance. It won’t be anything remotely close to that,” he said. “Homeowners insurance is available and it’s affordable.”

I.I.I. estimated that homeowner’s insurance policy premiums nationally increased 8 percent in 2002 and are expected to increase 9 percent in 2003.

A report, “Risky Business: Insurers’ Increasingly Risky Investments in Corporate America Cause Insurance Premiums to Skyrocket,” published by the taxpayers group charged insurers with being “blinded by greed” and jumping “headlong into the stock market bubble.”

“The 15 percent to 30 percent rate hikes common to many insurance consumers these days are not attributable to the reported rise in claim costs, as the insurers argue, but are due to the significant investment losses sustained by insurers in recent months,” the report stated.

The group said it reviewed the financial records of 10 insurance companies and found they “lost a combined $271.1 million in 2001 – 2002” as a result of investments in WorldCom, Enron, Adelphia, Global Crossing and Tyco—companies that have experienced well-publicized financial woes.

The 10 companies studied were Allstate Insurance Co., Auto Club of Northern California, Auto Club of Southern California, Farmers Insurance Exchange, Fireman’s Fund, Liberty Mutual Insurance Co., Mercury Casualty Co., Nationwide Mutual Insurance Co., State Farm Mutual Auto and the United Services Automobile Association.

But Hartwig said the insurance industry had 66 percent of its investment portfolio in bonds and only 21 percent in the stock market at year-end 2001 and that anyone who said otherwise was “wet behind the ears.”

“They have not seriously investigated the very conservative management of assets (by insurers) that is quite frankly the envy of the financial services industry....Insurers this year will generate $35-$40 billion off their investment portfolios,” he said.



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