Article Courtesy of The Miami Herald

By BEATRICE E. GARCIA
Published  January 9, 2007

Although the insurance industry has posted record profits in the past three years, home insurers have been overpricing policies and shifting risks to consumers, a new study released Monday by the Consumer Federation of America found.

Insurers have been systematically overcharging for insurance and shifting costs to consumers, the report found. Profits in the past three years have risen to record levels despite the increased hurricane activity of 2004 and 2005.

The CFA report echoes a reality many Florida homeowners have been living during the past two years, when insurance premiums have doubled and even tripled.

''Profits and a solid insurance industry are a good thing, but unjustified profits and excessive capitalization harm consumers,'' said J. Robert Hunter, a former Texas insurance commissioner and now director of insurance for CFA, who authored the study.

''The insurance industry carefully cultivates a perception that they're an ultra-high risk business, requiring excessive returns and huge premiums to fight off the onslaught of catastrophes,'' added Hunter during a news conference in Washington.

''But they are, in fact, low risk to investors, using standard measures of stock market performance, such as financial safety and stock price stability,'' he added.

DOUBLE THE PROFIT

The industry's net income rose to $59.9 billion last year, nearly doubling from the $31.2 billion earned in 2003, according to the CFA study.

Yet losses paid out as benefits to consumers by the top 10 insurers were an estimated 52 percent of premiums in 2006, a big drop from the 75 percent paid out in the late 1980s. The study notes that Allstate ``appears to be paying much less than half of the premium it collects in benefits to its policyholders.''

To be sure, the insurance industry is looking at its results in a different light.

''Insurers directed a significant share of their 2006 profits and investments back into the business,'' said Robert Hartwig, president and chief economist for the Insurance Information Institute.

Hunter's study noted that insurers have maximized profits by passing more risk onto consumers, such as limiting coverage or eliminating some coverage altogether. For instance, after the 2005 hurricanes in South Florida, many insurers have cut back drastically on coverage for screened pool enclosures or eliminated it entirely. Most insurers don't pay for mold removal unless it comes after water damage from a hurricane.

LEGISLATIVE SESSION

As Florida lawmakers get ready to tackle the state's insurance crisis, several ideas have been proposed that will reduce premiums somewhat for policyholders but also increase the risk they bear. For instance, allowing higher deductibles or permitting homeowners to buy just enough insurance to cover a mortgage mean they would have to pay far more to rebuild their homes after a catastrophe.

''I saw what happened in California last week. I saw that State Farm lowered their rates 20 percent because of these exorbitant profits that people are able to achieve in the insurance business,'' said Florida Gov. Charlie Crist.

''Big Insurance has a new day dawning -- and it starts the 16th,'' he added referring to the start of the special legislative next Tuesday to tackle the insurance problems.

The CFA study also found insurers have raised rates dramatically and are systematically underpaying claims.

While insurers acknowledge a significant increase in policyholders' surplus -- reserves set aside to pay future claims -- Hartwig warned that certain catastrophes, such as hurricanes and earthquakes, could produce insured losses in excess of $100 billion in a single year. Also, a terrorist attack utilizing nuclear, chemical, biological or radiological weapons could result in claims exceeding $700 billion.

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