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Putting profits over policyholders: insurance companies regularly plead poverty, saying civil justice is costing them untold grief - and money. Behind those crocodile tears, they're doing everything they can to avoid paying legitimate claims, while their profits soar to record heights.

Article Excerpt
Each February, the Insurance Information Institute (III) gathers Wall Street analysts and insurance executives to produce its forecast of the property-casualty industry. But unlike February's more famous prognosticator, Punxsutawney Phil, the gathered experts are almost certain to see their shadows, because for the last 20 years they have been predicting the imminent doom of their storm- and tort-ravaged industry. In fact, the industry's annual hand-wringing resembles the endlessly repeating day Bill Murray suffered in the movie Groundhog Day.

Consider 1987. Twenty years ago, III's state-of-the-industry report showed that insurance company earnings had improved substantially but not enough to compete with the Fortune 500. To address this imbalance, III said, the industry needed tort "reform." In particular, it needed a $250,000 cap on noneconomic damages in medical malpractice cases to ameliorate the "crisis." (1)

Almost 20 years later, III was again reporting results that were "superb," "robust," and "excellent," yet still "short of those realized by the Fortune 500." Again it declared "tort costs" a "major external risk" and argued for a $250,000 medical malpractice cap to deal with the "crisis"--although inflation has rendered such a cap worth one quarter of what it was when originally proposed. (2)

The financial performance of the property-casualty insurance industry during 2006 was extraordinary: In the first nine months alone, profits increased by $15.1 billion. (3)

In 1987, the industry was rebounding from the "liability insurance crisis" of the mid-1980s. Insurance officials took advantage of national media attention, such as Time magazine's 1986 cover story, "Sorry, Your Policy Is Cancelled." (4) More recently, insurance officials have made hay out of a "medical liability crisis" and a spate of massive catastrophic events. The 9/11 terrorist attacks sparked a wave of premium increases across the board, whether or not the insurance in question had any reasonable connection to terrorism. Even blueberry farmers saw triple-digit premium increases attributed to so-called terrorism risks. (5)

The property-casualty insurance business is inherently cyclical--a fact that the industry itself does not deny (6)--so it is no surprise that its clashes with consumer advocates have been repeated over and over again. Every setback in profits has led to aggressive attempts to recoup the industry's money, either by reducing losses or raising premiums--but always at the consumers' expense. Pleading poverty, threatening to withdraw from markets, cherry-picking customers, and finally--posting huge profits has been the industry's pattern for a quarter of a century.

Pleading poverty

In his 2004 state-of-the-industry report, Robert Hartwig, III's president and chief economist, called that year the "zenith" of profitability and bemoaned the industry's future, questioning whether "the decade could be saved." (7) Hartwig placed much of the blame on the civil justice system, claiming it was "among the factors that most significantly affect insurer financial performance." (8) The failure to pass tort "reform"--on class actions, asbestos, and medical malpractice--was, he said, "among the industry's biggest disappointments in 2004." (9)

The following year brought Hurricane Katrina, along with four other Category 5 storms. The $40 billion in losses attributed to Katrina nearly doubled the losses from the previous most expensive U.S. catastrophe on record, 1992's Hurricane Andrew. Hurricanes Wilma and Rita, the third and seventh most expensive hurricanes, respectively, added a further $15 billion in losses. (10) According...

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