Why Are Insurance Industry Profits So High?

The insurance industry reported record profits in 2006. According to the Insurance Information Institute (III), property-casualty insurers' profits increased $24 billion dollars from 2005 to 2006. In 2005, they earned profits of $49 billion; in 2006, that number increased to $73 billion! These figures are causing many to ask, 'Why are insurance industry profits so high?'

What analysts are saying

According to insurance industry analysts, insurance companies have increased their profits in three ways:

• Increased premiums. Insurance companies have increased their premiums across the board. The III reported that profits in the property-casualty lines have increased by an annual average of 46% since 1994.
• Paying fewer claims. Insurance companies have also decreased the amount of paid claims. Again, across the board. The III reported that property-casualty insurers paid out 64% of the premiums they received on claims in 1994. In 2006, that number dropped to 55%.
• Jumping ship. After a significant loss, insurance companies often jump ship. For example, many insurers will no longer insure homeowners in the southern states ravaged by Hurricane Katrina because of the significant losses they realized. Simply eliminating a book of business in these areas, while certainly their right, often leaves homeowners scrambling to find alternatives.

It actually seems very simple. Take in more money, pay fewer claims and get out of problem areas. Unfortunately, consumers are often the ones to pay the price – and when things go wrong, they often feel powerless to fight back. Since the insurance industry is not federally regulated, each state's insurance department is responsible for overseeing insurance company practices in their state. In most cases, these state run agencies simply don't have the staff to address every issue that they receive.

Bad for homeowners / good for investors

While high profits in the insurance industry have often come at the expense of homeowner claims, investors couldn't be happier. Investment analysts report that investing in an insurance company is not as risky as it used to be. In fact, it can be very profitable. On the other hand, consumer analysts question some of the insurance industry's tactics. Television commercials often tell consumers that they're 'in good hands' and that they're insurance company 'is there' for them in their time of need. However, when you compare an insurer's ads to their paid claims and ongoing lawsuits, it just doesn't seem to add up.