Are insurance companies doing enough to protect victims of natural disasters?

By Posted : 02/21/2012

hurricane houseInsurers are cutting coverage and paying fewer benefits for damage due to tornadoes, hurricanes, floods and other natural disasters, according to a study released by the Consumer Federation of America (CFA).

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The study, "The Insurance Industry's Incredible Disappearing Weather Catastrophe Risk," contends that insurers "have hollowed out the coverage they offer to homeowners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed. These coverage reductions expose taxpayers to higher disaster assistance payouts because homeowners have less money available to help themselves."

The CFA report says that policyholders have endured "significantly raised rates over the years" when it comes to buying protection. Insurers have also shifted coverage for homes in high-risk areas to state insurance pools, reducing the insurers' own financial jeopardy, according to the CFA.

Eleven states have recently received requestsfor homeowners' insurance rate increases of 18 percent or more, according to the report. The states, according to the CFA, are Alabama, Arizona, Colorado, Georgia, Kansas, Kentucky, Maine, South Carolina, South Dakota, Tennessee and Virginia.

The study does stress that major insurers have frequently saved money through "legitimate" strategies, including risk diversification and other prudent financial decisions. But the applause ends there.

"Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on homeowners, many of whom are coping with severe financial difficulties in a bad economy," says J. Robert Hunter, CFA's director of insurance. "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."

Insurance group: Report 'out of touch with reality'

The Insurance Information Institute (III), which has battled with the CFA in the past, attacked the report. Robert Hartwig, III president, characterizes it as "totally out of touch with reality … it's beyond bizarre." He disputes the view that insurers are not paying enough in catastrophe claims, saying losses from natural disasters are approaching record highs and could grow in coming years as more people migrate to coastal and other higher-risk regions.

"The timing of this report strikes me as odd considering 2011 was one of the most expensive years in history" for insurers when it came to paying homeowner claims, Hartwig says.

It's appropriate for homeowners to spend more for coverage if they pick states prone to natural disasters, says Loretta Worters, vice president of the III. "If they decide to live in high-risk areas and take on that risk," she says, "they should bear some of that (financial) responsibility" if a catastrophe strikes.

Both Hartwig and Worters also say insurers are not overcapitalized at the expense of consumers. Insurers with good balance sheets guarantee payouts for policyholders, they say. Hartwig asks if critics would prefer insurers to be undercapitalized and unable to meet their obligations.

The study concludes that the industry has shifted from a calculated risk-taker to a risk-avoider. "Not only have insurers insulated themselves from their historic share of hurricane risk, they have made no serious effort to cover risks associated with floods or terrorism, which are entirely backed by federal taxpayers," according to the federation.

Consumer group's action plan for disasters and insurance

The CFA suggests several state and federal steps to protect consumers and taxpayers.

The federation recommends states:

  • Carefully examine national data on limited catastrophe losses and excessive surplus before approving any insurer-requested rate increases.
  • Be "on guard against unwarranted attempts" by insurers to use catastrophe losses as part of their rationale for "jacking up rates."
  • Ban use of "fine-print tricks that unjustifiably deny policyholders coverage when they need it the most," such as anti-concurrent causation clauses.

In addition, CFA recommends that coastal states form an interstate compact to spread risk and lower costs by developing common insurance pools and provide consumers and insurers with consistent requirements. A common approach would also better position states -- especially small ones -- to "resist coercive efforts by insurers to weaken regulatory protections for consumers," according to the federation.




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