National insurance profits, premiums at record highs

SYRACUSE - A recent report issued by Neu, York City Comptroller William C. Thompson, Jr. cited record profits for the insurance industry nationally that are resulting in increased expenses for residents of New York State.

Thompson's report, entitled "Highway Robbery: The High Cost of Automobile

In New York, auto insurers received $10.5 billion in premiums in 2005, a 29 percent increase from premiums of $8.2 billion in 2000, according to Thompson's report.

During those five years, incurred losses decreased from $6.4 billion to $5.1 billion, a drop of more than 20 percent, the report states.

The high premiums/low payouts trend is also evident in property and casualty insurance.

The report stated that, "Nationally, the property and casualty insurance industry, which includes automobile insurers, is expected to report record net income of $60 billion in 2006, up from a near record $43 billion in 2005; New York drivers are contributing disproportionately to this success."

In 2005, New York State auto-insurance companies reported $10.5 billion in earned premiums - premiums may be paid in advance, but insurers do not fully earn premiums until the policy has expired - as opposed to only $8.2 billion in 2000. The industry paid out $6.4 billion in insurance claims in 2000, compared to claims of $5.1 billion in 2005, according to Thompson's report, which utilized figures from the National Association of Insurance Commissioners (NAIC).

The NAIC also noted that the period from 2000 to 2005 saw the loss ratio in New York State drop from 78.3 percent to 48.4 percent of premiums. The loss ratio is that amount of the premium used to pay claims.

Donna Van Auken, owner of Cicerobased Affordable Auto Insurance Agency Inc., says big insurance companies are likely profiting from the high premiums.

"I don't know who is making the money, but it isn't the small agencies," she says.

Van Auken has seen her company's business decline 20 percent to 30 percent since 2005. After speaking to owners and competitors, she thinks that other small agencies in the area have taken a major loss.

"We've really been hurting this year," Van Auken says. "Other agencies have said the same thing. It's a soft market because people aren't shopping around."

The Internet and direct calling are the main factors contributing to Affordable Auto's troubles. Van Auken also says she has lost a lot of business to Geico, which does a lot of television advertising.

"We deal mostly with high-risk automobile insurance , which is more competitive now because of the Internet,'' Van Auken explains.

Affordable Auto Insurance has two locations: the Cicero office in which Van Auken and another full-time employee work; and a Syracuse office, which employs three full-time workers and two parttime workers. Van Auken had to lay off a part-time worker last year, due to declining profits and revenue.

Some larger agencies in the Syracuse area, however, say they're prospering.

"Our agency is doing well," says Joseph D. Falcone, a property and casualty agent with the 86-year-old Dominick Falcone Agency Inc. "This year, for the most part, all large agencies are doing well."

Falcone explains that agencies act as distribution systems for insurance companies, which keep a major portion of the money. So just because companies are doing well doesn't necessarily mean that agencies are benefiting as well because agencies usually only receive a trickle of the money companies earn.

Falcone notes that Hartford-based Travelers Insurance and New Hampshire-based Peerless Insurance are national and regional examples, respectively, of insurance companies currently doing very well.

"Every one of them are having an excellent year because the lack of large claims drives their profits," he says. "Since it has been a quiet year disaster-wise, their investment income has gone up. Loss ratios are down, so that is a double windfall for the insurance companies and translates to record profits."

For example, Hartford, Conn.-based Aetna (NYSE: AET) reported third quarter 2006 revenue of $6.3 billion, up 11 percent from $5.7 billion in the third quarter of 2005. The insurance company also reported net income of $476.4 million in the third quarter of 2006, an increase of 28 percent from $372.8 million the year before.

Report critic

Timothy Dodge, director of research and external communications with the DeWitt-based statewide trade group Independent Insurance Agents & Brokers of New York, Inc., argues that Thompson's report "distorts" the truth.

"Since the fall of 2004, auto-insurance companies [in New York] have lowered premiums half a billion [dollars]," Dodge says. "New York State has an extremely competitive autoinsurance market..."

Thompson's report states that the postNovember 2004 premium reductions made by 20 auto-insurance companies have been insufficient.

"Although these reductions are certainly a step in the right direction, they remain insufficient to address the continuing cost disparities for New York City motorists," the report states. "A reduction of at least $1.5 billion in insurance premiums would restore the industry's historical levels of profitability."

Dodge suggests a different method for increasing competition in the insurance industry.

"From the late 1990s until 2001, a system of 'flex rating' allowed insurance companies to lower or increase rates 7 percent," he says.

The New York State Insurance Department allowed that legislation to expire in 2001, so if an insurance company wants to lower rates today, they have to jump through hoops to do it, Dodge explains.

"I think the flex rating system in the 1990s worked very well because it allowed companies to react to changes in the market," Dodge says. "Consumers were protected from extreme premium increases, but they also benefited from lowered rates."

Dodge adds that flex rating would allow today's insurance companies and agencies to compete with Geico, because they could lower rates without regulatory permission to match Geico's offerings.

"The fact that companies have to fill out so much paperwork to change rates has really dampened their competitive ability," Dodge concludes.