Strong Insurance Company Finances Benefit Consumers, Says AIA

Washington, DC – "Insurance company profits are essential to providing insurance coverage relied upon daily by American families and businesses," according to Gov. Marc Racicot, president of the American Insurance Association (AIA). Gov. Racicot recently responded to new Consumer Federation of America (CFA) allegations and unfounded attacks on individual property-casualty insurance companies, as well as the industry in general.

"Insurance is a business based on risk, and any risky business proposition must have a relatively high rate of return for investors from time to time, or the investors will take their capital elsewhere, and that business will cease to exist," noted Racicot. "Fortunately for all Americans, the property-casualty industry had a much better year financially in 2006 than in 2005 or 2004, when we saw record losses from natural disasters.

"Last year was a fortunate anomaly given that in virtually every year over the past two decades, insurers lost money on their core business operations. In fact, the U.S. property-casualty industry as a whole has had only two underwriting gains at year's end during the past 27 years. After record losses in 2004 and 2005, the respite provided by 2006 has meant that insurers could replenish the capital that they must have on hand in order to stand behind the policies they sell. Healthy balance sheets better prepare insurers to face future catastrophes, and greatly benefit consumers."

Racicot also noted that, in fact, prices for auto insurance and other types of property-casualty insurance are falling around the country, with the major exception being coastal property insurance. "This makes sense, given that insurance rates are set according to the risk of loss in each state," Racicot said. "Because insurance rates in each state must reflect the actual and expected loss experience within that one state, each line of insurance - such as homeowners - must stand on its own in terms of profitability."

Racicot also refuted CFA comments about industry public policy positions related to terrorism and natural catastrophe risks. "Unfortunately, CFA simply refuses to understand that terrorism risk today essentially is equivalent to war risk, making it wholly uninsurable by the private sector alone. A public-private partnership is needed to deal with terrorism losses that could be virtually infinite in scope, particularly if an attack involves chemical, nuclear, biological or radiological weapons," Racicot stated. "There is broad, bipartisan agreement on Capitol Hill, and broad consensus among policyholders, that a long-term national terrorism insurance program is critical to the ongoing economic security of this country."

As for proposals to create a federal natural disaster reinsurance fund, Racicot noted that, while a couple of large property insurance companies support the idea, the great majority of property insurers oppose such a plan. "Government catastrophe funds do have some political appeal because they subsidize the high cost of living along the high-risk coasts," Racicot acknowledged. "Unfortunately, such subsidies also encourage construction that knowingly puts people and property in harm's way." AIA members believe there is a better way to allow private markets to function and protect coastal communities; that approach includes fortifying property already in existence, enacting and enforcing strong building codes and smart land use policies in undeveloped areas, and implementing true risk-based pricing, along with other regulatory, legal and financial reforms.

"It is extremely difficult to create and maintain robust financial security systems to deal with mega-catastrophes – whether natural or man-made," concluded Racicot, "and the solutions also are multi-faceted, involving varied private and public mechanisms. Insurers are committed to working with policyholders, policymakers and other interested parties to tackle tough market issues and create real, lasting solutions. We hope that CFA will join in these conversations, which must be based on fact and real experience, rather than baseless accusations about individual companies or industry segments."

SOURCE: American Insurance Association