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Insurers push disaster costs to consumers and taxpayers, report finds

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Insurance companies that cover property damage from catastrophes are increasingly pushing costs onto the backs of consumers and taxpayers, according to a new report from the advocacy group Consumer Federation of America.

Corporate insurers have “mastered” making money off hurricane coverage while keeping their own costs low, says the federation. It says that despite record-breaking damage costs from disasters over the last decade, policy providers steadily increased their surplus cash by raising rates, paying for fewer types of damage, increasing the deductibles of disaster victims and placing caps on certain rebuilding costs.

One maneuver the consumer federation called “Draconian” involves insurers refusing to pay out any claims in which one type of damage is covered but another is not, such as gales of wind turning a home into rubble and stormwater later flooding the same property. Beyond the coverage amount, other unanticipated costs can be dumped on consumers, such as a spike in prices for construction materials or new building codes enacted after disasters.

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“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,” states the report [PDF] released this month.

Thomas Russell, an associate professor of economics at Santa Clara University who’s written about disaster insurance, said the consumer federation is focused on the wrong problem. Americans don’t want to buy the necessary insurance, he said in an e-mail, and would rather wait for taxpayers to bail them out when catastrophes occur. He pointed out that in other countries, such as New Zealand, earthquake insurance is mandatory.

“The problem is not getting insurance companies to carry more catastrophic risk,” Russell said. “The problem is getting consumers to buy this insurance.”  

The industry-backed Insurance Information Institute countered the consumer federation's report with its own statement, arguing that last year’s “extraordinary” spring tornadoes, Hurricane Irene and severe winter weather had drained more than $18 billion from its surplus by September.

“The premium an auto, home or business insurer charges must be commensurate with the risk they are assuming on behalf of the policyholder,” institute President Robert Hartwig said in the statement. “Insurers remained solvent, met their financial commitments, and some even grew their business 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 colors.”   

Last year was one of the worst for disasters in the United States. The federal government formally declared 99 events “major disasters,” a designation that’s required to unlock critical aid for victims. That’s more major disaster declarations than any year since 1953.

Tornadoes last spring wiped out whole cities in Missouri and Alabama. Hurricane Irene delivered menacing rains to the Eastern Seaboard. Flooding in April and May caused the Mississippi River to swell and drench communities with stormwater from Illinois to Louisiana, while fires scorched central Texas.

California escaped relatively unscathed, with six declarations affecting 13 counties. But the 1994 Northridge earthquake is still ranked among the most expensive disasters in the country, behind only Hurricane Katrina, the 9/11 terrorist attacks and 1992’s Hurricane Andrew. The earthquake left 20,000 people homeless and damaged buildings in Ventura, Los Angeles, San Bernardino and Orange counties.

Companies are paying out less money to disaster victims in the wake of catastrophes, says the consumer federation’s report. Hurricane Andrew in 1992 damaged more than 100,000 homes and destroyed 25,000 more. That year, insurers shelled out $17 billion in claims to victims of the devastation, almost 65 percent of total losses, according to the Insurance Information Institute.

Insurers paid much less following Katrina – less than 50 percent of total losses. The consumer federation says Katrina should have cost insurance companies $18 billion more if the same payout ratio from Andrew was used.

So who makes up the difference? In many cases, taxpayers do.

The Federal Emergency Management Agency spends millions handing out disaster assistance payments for temporary housing, food, clothing and home reconstruction. Insurance companies in some cases have declined to renew policies for certain areas of the country, leaving homeowners with the option of special insurance pools similar to the National Flood Insurance Program and the California Earthquake Authority

“The state pools have become the largest writers of insurance in some states,” according to the consumer federation’s report. “Such an arrangement allows insurers to ‘cherry-pick’ these states, keeping the safest risks for themselves and shifting the highest risks onto the taxpayers of the state, thereby socializing high-risk, potentially unprofitable policies and privatizing the low-risk, profitable business.”

Congress created the National Flood Insurance Program during the 1960s to provide coverage where standard homeowner policies sold by private insurers did not. While controlled by FEMA, insurance firms earn hundreds of millions in fees each year to administer the program.  

The Government Accountability Office, the investigative arm of Congress, concluded in 2007 [PDF] that FEMA couldn’t ensure the size of such fees was “proper,” and the consumer federation calls them “excessive." Fees to insurance companies are calculated as a percentage of total premiums and amounted to $1.6 billion in 2006 after Hurricane Katrina. 

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