McCarran-Ferguson and Its Discontents (II): Bob Hunter
I-sters,
Robert Hunter, the former Texas insurance commissioner, head of the Consumer Federation’s insurance section and well-known
“King of the Nepi Tanc,” testified before the Senate Judiciary Committee on March 7, and if you have any interest in understanding post-Katrina insurance issues, ITP strongly suggests you take a look at it. It’s in the Key Documents section.
War Eagle and I had to fight over who got online to read it first. I won, and War Eagle was stuck with a hard copy Rep. Bobby Jindal’s 2/28/07 testimony before the House Financial Services Committee, which is kind of like wanting the SunTimes sports section and getting the Chicago phone book instead.
But here in 30 pages is as good an explanation as you’ll need on why the U.S. insurance system looks the way it does — a big part of the problem, to ITP’s mind, rooted in what turns out is a 62-year-old accident: the industry’s anti-trust exemption. What was supposed to be a temporary moratorium on anti-trust enforcement popped out of a conference committee in 1945 as a permanent, anomalous feature of the American economy.
Where to begin?
How about the section on Insurance Services Offices Ltd., the closely held Jersey City, N.J., “rate bureau” that helps the industry set prices, industrywide, by collecting loss and expense figures — which are up to 70% of what goes into the industry’s price — and projecting them into the future:
“Legal experts testifying before the House Judiciary Committee in 1993 concluded that, absent McCarran-Ferguson’s antitrust exemption, manipulation of historic loss data to project losses into the future would be illegal…This is why there are no similar rate bureaus in other industries.”
To get the final rate, insurers need only plug in one of ISO’s “multipliers,” which calculates the loss costs times whatever expense and profit figure the insurer provides. LC x M= R. An oversimplification? Sure, but by how much?
And, as Hunter correctly points out, ISO and other rate bureaus “must bias their projections to the high side to be sure the resulting rates and loss costs are high enough to cover the needs of the least efficient, worst underwriting insurer-member or subscriber to the service.”
Need proof? Check out Attachment B, which lists industry expense ratios from 2004. The average homeowners insurer spent 38% of each premium dollar on loss adjustment (lawyers, etc.) and underwriting (sales commissions, etc.). Put another way: Spread that over the $420 billion in annual property/casualty (non-life and health) premiums and you get $160 billion, or enough to pay for three maybe four Katrinas.(0)
War Eagle says: “Dis iz tue mush.”
An unfair comparison? Ok, but the point is, the money goes to neither policyholders or industry earnings. And I won’t even tell you what Hunter’s group of below-average efficiency insurers spends. The mutual fund that spent 5% of investors’ capital on expenses would be laughed out of the industry.
ISO also writes policy language for the industry, including, according to Hunter, the now-infamous anti-concurrent causation clause, which was approved by Mississippi Insurance Commissioner Dale (and, to ITP’s knowledge, the rest of the nation’s insurance commissioners), but, in an embarrassment to Dale, voided by Judge Senter (1).
And what about “Colossus?” That’s the name of the software program that has transformed claims-handling in the personal lines (homeowners, auto) industry since it was developed in the mid-1990s for Allstate by Computer Services Corp., the El Segundo, Calif., contracting giant and insurance industry vendor (which, incidentally, has administered the National Flood Insurance Program since 1983).
Hunter quotes Berardinelli et. al(2): “…Any insurer who buys a license to use Colossus is able to calibrate the amount of ‘savings’ it wants Colossus to generate…If Colossus does not generate sufficient ‘savings’ to meet the insurer’s needs or goals, the insurer simply goes back and ‘adjusts’ the benchmark values until Colossus produces the desired results.”
The idea of finding savings in claims — – whether you like it or not — represents a radical departure from insurance industry tradition.
Hunter quotes James Greer, President of the Property/Casualty Claims Professionals, clearly a member of the old school:
“As a member of an old Aetna family that has been widely dispersed since its demise in the ’90’s, I remember the day when leaders of that fine company routinely cited, and tried to honor, the social/moral contract the insurance industry had with society. It is clear that, in today’s business environment, the soul of the insurance industry is missing, and despite the rhetoric of its PR machine, the industry no longer recognizes such a social/moral obligation.”
Everyone’s starting to sound like Amy Bach(3).
Ok, last thing, then I promised to take War Eagle for a bath at the Szechenyi:
The above links to Hunter’s graph of insurance-industry payouts for actual losses as a percentage of premiums, which in 1993, before Colossus, approached 77 cents, was just 62 or so in the worst-ever Katrina year and hit just above 50 cents last year.
Here’s where Hunter flies off the handle:
“It is truly inappropriate for property/casualty insurers to be delivering only half of their premium back to policyholders as benefits.”
Hey, watch that language. This is a family insurance site.
Let’s go, War Eagle, and don’t forget your flipflops. That new Speedo makes him look so Hungarian!
0. Private note to Amy Bach: How much do you like your agent now?
1. Much more on the meaning of ACCC later.
2. From “Good Hands” to Boxing Gloves (Trial Guides, 2006).
3. Executive director of United Policyholders, former towel maiden at the Szechenyi.