Study suggests insurers ‘manufacture’ crisis situations to jack up rates

Tamara E. Holmes

Insurance rates are determined by an array of factors, ranging from where a policyholder lives to his or her claims and credit histories. Now, a controversial study by a coalition of public interest groups suggests another factor: Property and casualty insurers — the companies that help protect your car and home — come up with “manufactured crises” to justify rate hikes.

The study, “Repeat Offenders: How The Insurance Industry Manufactures Crises And Harms America,” asserts that the property and casualty insurance industry creates “hard markets,” or periods when insurance becomes more expensive and harder to get. Commissioned by Americans for Insurance Reform, the study says the country is headed for higher insurance rates as a result of a new “hard market.”

“Hurricane Irene in late August 2011, which was greatly hyped by the Weather Channel but wasn’t nearly the catastrophe that was expected, has been used by insurance industry representatives to push the country into a new hard market,” the report says. “This is despite the fact that the industry is perfectly able to handle those claims in addition to having stored away excess profits for decades so that today, it is in an all-time safe position.”

A new study accuses insurers of leaning on disasters like Hurricane Irene to justify rate hikes.

The study’s authors are Robert Hunter, director of insurance at the Consumer Federation of America, and Joanne Doroshow, executive director of the Center for Justice & Democracy at New York Law School. They contend that during these hard markets, insurance executives engage in anti-competitive practices by pressuring their rivals to raise rates. Furthermore, they say, weak state regulatory laws are partly to blame for these hard markets.

“Companies get away with creating these crises without any accountability because the states just don’t act and sometimes don’t have the power to act,” Doroshow says. Additionally, she says, state insurance departments often are understaffed or underfunded, so they can’t focus enough resources on oversight.

A flawed analysis?

Not surprisingly, the insurance industry takes issue with the study.

The industry-backed Insurance Information Institute calls the study flawed, pointing out that the property and casualty industry paid out $108 billion in claims in 2011 alone — the second highest amount ever. In the meantime, the institute says, some insurance customers have seen their rates drop. For example, insurance premiums for businesses have fallen 40 percent between 2004 and 2011, the institute says.

“The Americans for Insurance Reform report ignores the fact that trillions of dollars paid by insurers to millions of claimants in recent years is the single most important source of recovery for individuals, businesses and entire communities in their time of greatest need,” Robert Hartwig, the institute’s president, says in a statement. “Despite such large-scale claim activity and global economic turmoil, insurance remains universally available and affordable.”

Others point out that safeguards already are in place to prevent price-gouging. According to the National Association of Insurance Commissioners, state insurance regulators do have mechanisms to review rates for auto insurers, home insurers and other companies in the property and casualty market. Some states require rates to be approved before they take effect, while others allow an insurer to impose new rates while the state reviews them.

The effect on consumers

Despite disagreement about the study, one fact is clear: Periodic price escalations have taken place, and insurance consumers have felt the sting.

“It’s like sticker shock on a policyholder to suddenly get their rates increased by some large amount,” Doroshow says. In some cases, consumers have experienced 100 percent to 200 percent increases, she says. “Rates stay low and then they suddenly shoot up, and people are understandably feeling that they’ve been price-gouged,” Doroshow says.

Yet consumers aren’t totally at the mercy of insurance companies.

If you have questions about a premium increase, you should contact your insurance agent or insurance company, according to the National Association of Insurance Commissioners. What you need to find out is how you were rated by your insurer and whether something in your claims history, credit history or driving record triggered the rate increase. If you’re not satisfied with the answer, contact your state insurance department to file a complaint, the association says.

Doroshow says consumers shouldn’t stop there. If you think you’re being unfairly hit with higher rates, “it doesn’t hurt to let the attorney general of the state or even the governor know what’s going on,” she says. “A lot of times consumers or policyholders feel intimidated and like they have no power to complain, but really they do.”