As many states push for double-digit hikes in homeowners’ insurance rates, the Consumer Federation of America has released a report claiming private insurers have increasingly shifted the burden of coverage onto consumers’ shoulders.The study, “The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk,” looks at how severe weather coverage – hurricanes, tornadoes, and floods – has changed over the last two decades.
The time period is crucial, as seven of the largest 10 disasters in U.S. history have struck since then.
“In the last 20 years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher homeowners’ rates,” said J. Robert Hunter, CFA’s Director of Insurance.
Most of the comparisons in the study are drawn between the coverage consumers enjoyed pre-Hurricane Andrew in 1992 and in a post-Katrina economy.
Insurers paid $18 billion (14%) less to homeowners after Hurricane Katrina (2005) than after Andrew, the study says, mostly because insurance rates spiked after Andrew hit and insurers reduced overall coverage.
“The insurance industry has moved from its historic role as a calculated risk-taker to one of a risk-avoider, exposing consumers and taxpayers to much higher costs,” the report says. “Not only have insurers insulated themselves from their historic share of hurricane risk, they have made no serious effort to write flood risk and terrorism risk, which are entirely backed by federal taxpayers.”
The CFA points to a number of tactics insurers have utilized as a means of limiting coverage for natural disasters, such as refusing to pay for wind damage if it coincides with flood damage.
Over the years, insurance companies have shied away from offering coverage for events typically left to the federal government, such as terrorist attacks and mass flooding.
Said Hunter: “The fact that insurers do not take financial risk for either flood or terrorism insurance is a huge policy error. Taxpayers are required to pick up huge risks that private insurers are more than capable of identifying and backing.”
To its credit, the Insurance Information Institute defended itself against the CFA’s report, saying in a recent statement that 2011’s deadly tornado season cut billions of dollars from private insurers’ surplus funds and that coverage has become more affordable in vulnerable coastal areas.
“The premium an auto, home or business insurer charges must be commensurate with the risk they are assuming on behalf of the policyholder,” said Dr. Robert Hartwig, an economist and president of the Institute.
“Insurers remained solvent, met their financial commitments, and some even grew their businesses during one of the most challenging economic downturns since the Great Depression. The industry’s business model was put to the test, and passed with flying colours.”