Washington, D.C. – A comprehensive new study of the property/casualty insurance industry, How the Cash Rich Insurance Industry Fakes Crises and Invents Social Inflation, was released today. The study shows that this industry is, once again, in the process of deceiving businesses, consumers, and regulators in preparation for a national insurance crisis of skyrocketing rates, while sitting on more cash than at any time in its history.
The Consumer Federation of American (CFA) and the Center for Justice & Democracy (CJ&D) prepared the study. Written by J. Robert Hunter, CFA’s Director of Insurance, Joanne Doroshow, CJ&D’s Executive Director, and Douglas Heller, CFA’s Insurance Expert, the study exposes the industry’s long history, in the mid 1970s, mid-1980s and early 2000s of creating crises that blame lawsuits, juries, and injured victims for premium hikes even though litigation data and the industry’s own loss data show that claims were actually stable throughout each of these crises. Research has shown that rate increases during each crisis were driven by insurers’ economic cycle not spikes in insurance claims.
Co-author Joanne Doroshow said, “It is appalling that, for decades, the insurance industry has gotten away with victimizing U.S. businesses by creating crises in insurance affordability and availability, while falsely blaming juries and victims for the industry’s own mismanagement. The public has had enough of this endless cycle and the periodic crises that accompany it. We hope insurance regulators finally take some steps to reign in the excesses of the insurance industry, whose business practices are wreaking havoc on both businesses and injured victims who are falsely blamed for this.”
“Over the last several months, insurance industry representatives have begun to the lay groundwork for significant premium hikes with a seemingly coordinated effort to market the idea that litigation is the culprit,” said co-author J. Robert Hunter of CFA “But this time around the industry has developed a new term for their old target, blaming ‘social inflation’ in courtrooms for problems that really result from unrelated economic conditions facing the industry. In the data, we are able to see that the insurance industry is responsible for what’s happening in the market now, just as it was when prices spiked sharply about 15 years ago and 15 years before that, too.”
The study calls this new nomenclature “a hoax, a way for insurers to once again try to deflect blame away from the industry’s own accounting and underwriting practices as an attempt to justify unnecessary rate hikes.” The term “social inflation,” is used to encompass a wide-ranging and shifting litany of litigation-related complaints from the insurance industry. But, as the study shows, the data don’t support any of the inflation suggested by the industry’s new term.
The findings of this study come at a crucial time as industry leaders have begun publicly pushing the false idea that the industry is financially beleaguered and cannot pay claims without significantly raising rates. Already, companies have started to increase premiums in certain commercial lines of insurance. Some of the studies’ key findings are:
- Insurance companies have a massive surplus. The insurance industry claims it is suffering losses, but it is actually prospering. Claims of financial peril are easily proven to be untrue. In fact, insurers’ surplus – the money held above that reserved for expected losses – doubled from 2004 to 2018, quadrupled since 1994, and has risen by more 5,000% over the past 60 years. It is now at all-time record levels.
- An economic cycle has been driving insurance rates for generations. Over the past five decades, insurance rates have gone up and down in sync with the insurance industry’s economic cycle. The cycle leads to what are known as “hard” (increasing rates) and “soft” (low or decreasing rates) insurance markets. Since around 2006, the nation has been in a “soft” insurance market but the industry is now attempting to end it by signaling to each other to raise prices and tighten markets. Given the industry’s excessively capitalized financial condition, there is no reason why the soft market should be turning.
- Anti-competitive behavior within industry facilitates coordinated pricing strategies. The industry can get away with signaling among themselves that rate action is about to occur because the industry enjoys an exemption from antitrust laws.
- Industry has invented a new term to shift blame for its economic cycle. Over the last few months, insurance executives and consultants have been boldly declaring to the entire industry that it is time to raise rates on business policyholders because of a concept known as “social inflation.” The existence of “social inflation” is contradicted by all credible evidence: litigation trends, jury verdict trends, insurance claims data, and other basic facts. “Social inflation” does not exist.
- Loss inflation by insurers is shown in the data. The insurance industry inflates losses by manipulating its own claim reserves at key moments to justify rate hikes particularly as it is trying to trigger a hard market as is likely happening today. While reserve hikes lead to price increases, these reserves are later released into profits by insurers.
- Actual insurance payouts have been stable for decades. Since 1999, total commercial insurance payouts have never spiked and have generally tracked the rate of inflation and population. Premiums and reserves, however, have gone up and down in sync with the insurance industry’s economic cycle and are not reflective of any trends in paid claims.
- After adjustments for inflation, population growth, and annual mileage, losses have declined in key commercial insurance lines. Over the last 20 years, adjusted losses have stayed generally flat or increased relatively little. What’s more, adjusted losses decreased in three major areas of commercial insurance: Commercial Multi-Peril, Commercial Auto Liability, and Medical Malpractice.