PCI Rebuffs CFA Report Of Industry Profits

Chicago, IL - A Consumer Federation of America report mischaracterizes the facts involving the profitability of the insurance industry, according to the Property Casualty Insurers Association of America (PCI).

"Consumers are among the primary beneficiaries of a financially strong insurance industry," said Genio Staranczak, chief economist for PCI. "Profits allow insurers to reinvest in the business so that there is sufficient capital available to pay claims when a major catastrophe occurs. Additionally, increased profitability spurs competition among companies, a trend we're already seeing in many lines of insurance across the country. Increased competition means more dollars in the pockets of consumers."

According to data compiled by MarketScout in Dallas, for example, rates, as of December 2006, were down 8 percent on a composite basis for all business property and casualty coverage placed in the United States. In addition, the November 2006 consumer price index for personal auto insurance was up about 1 percent over last year – less than overall consumer inflation.

However, 2006 profits are in large part due to a year that has been absent of major catastrophe losses and only offset less than stellar returns achieved in previous years. Despite, the financial health of the industry as a whole, it's important to note that these figures are for all lines of business – from auto to workers compensation – in all parts of the country.

"The national numbers demonstrate that through investment gains and sound risk management in states not exposed to the extremes of hurricane losses, the industry is performing well. However, the industry has historically been less profitable than other sectors of the economy," said Staranczak.

From 1996 to 2005 insurers earned an average return on equity of 7.0 percent compared to 13.0 percent for Fortune 500 companies. As recently as 2001 property and casualty insurers recorded losses and in 2002 the industry earned a meager 2.2 percent return on equity. Insurers' profits are dependent upon the frequency and severity of natural catastrophes. Over the last decade, insured losses from major hurricanes have ranged from being very minimal in both 2001 and 2002 to $57.2 billion in 2005.

"Generally speaking insurers do not make money through underwriting insurance," said Staranczak. "Over time premium income is entirely paid out to cover claims. The charge that insurers are overcharging can not be substantiated by the facts."

SOURCE: Property Casualty Insurers Association of America (PCI)