Insurance Industry Creates a 'Hard Market' Harmful to American Business during a Tentative Economic Recovery
CAMARILLO, Calif., January 5, 2004 -- A fragile economic recovery worldwide, ongoing war jitters and apprehension among U.S. consumers to spend. Add to the woes of U.S. business a recalcitrant insurance industry, more interested in avoid claims than admitting responsibility and paying them.
"In the ever-cyclical insurance market, the largest carriers develop new strategies when experiencing claim losses and poor returns on investments," notes David Wood, co-founder of Wood & Bender LLP, the nation's leading law firm in the fast-growing practice of insurance policy enforcement. "Many insurers seek to recoup losses through increased premiums and hardball claims handling. A popular tactic is eviscerating well-established legal precedents concerning the interpretation and enforcement of insurance policy terms."
Wood notes that many of the largest commercial insurers in the U.S. adopt a three-step approach to cashing in on the strangulation of certain sectors of American business:
Insurance Industry Scare Tactics
Commercial insurers often use aggressive marketing tactics to scare policyholders into a buying mood. Wood commented that one large carrier placed full-page advertisements targeting outside directors of public companies, intoning dire predictions of exposure to the director’s personal assets under prevailing business conditions. According to the ads, the only way the director was ensured protection of personal assets was to urge his company to buy insurance.
"While director liabilities are indeed climbing, just because an insurance company is big and well-capitalized does not mean it will pay claims when they arise – much less the kind of catastrophic claims predicted by the ad," Wood adds.
Predatory Pricing
Carriers price products as high as possible, often far beyond the actual, amortized cost of the loss exposure. Consider what the insurer of a large corporation does: it finances risk. It predicts, based on data, the likelihood of a particular future loss occurring, assigns a risk value and amortizes that value over the period during which the loss is likely to occur. The resulting figure, with a large service charge added, represents the premium charged for the risk. In a "soft" market, multiple insurers compete, each examining the underwriting process for ways to reduce the premium and win the account. In a hard market, the absence of meaningful competition enables carriers to hike premiums to what the market will bear. "The resulting numbers often resemble only slightly the actual, amortized cost of lost exposure plus a reasonable service charge," Wood observes.
Reduced Service
In a competitive environment, insurance companies that do not pay promptly and in full do not win business. When increased risk is perceived, prices rise, competition decreases and the largest carriers become the remaining option. They know that if the corporate policyholder wants coverage, it will have to return to the well, despite some claims not being paid. By fighting claims, insurers save money and boost profits (at the expense of the insureds). "In effect, litigation is a profit center," comments Wood.
Special Treatment for Insurance Companies
Carriers get away with the scare tactics, the usurious pricing and the cutbacks in claim payments largely as a result of the McCarran-Ferguson Act (15 U.S.C. §§ 1012, 1013(b)), which Congress passed in 1945, exempting the business of insurance from federal antitrust laws.
A hard insurance market typically provokes a groundswell of pressure for repeal of this exemption based on the perception that state insurance regulators lack zeal for enforcing state laws prohibiting anti-competitive conduct. Insurers share the data used to calculate premiums as a matter of institutional practice. Information sharing for the specific purpose of fixing prices would be criminal in any other industry.
"In a hard market, the public lynching of corporate America makes a good case for repeal of the McCarran-Ferguson Act, and for subjecting insurers to the same level of federal scrutiny as any other nationwide industry," David Wood continues. "As the market continues to remain stagnant, insurers will continue to recoup losses through the use of increased premiums, hardball claims and the development of litigation as a profit center. It is no small wonder that corporate America feels strangled by the largest carriers."
About Wood & Bender LLP
Wood & Bender LLP is the nation's leading law firm in the fast-growing practice of insurance policy enforcement. The firm focuses on five critical services: analyzing and recommending optimal insurance strategies, negotiating with carriers and customizing clients' insurance portfolios, evaluating and enforcing claims of loss, developing clients' business settlement and litigation strategies, and preparing the litigation defense of clients to compel insurers to assume their responsibilities. Wood & Bender serves mid-sized to Fortune 1000 corporations, large non-profit institutions and public entities, as well as partners with attorneys at mid-sized and large law firms who require support in insurance enforcement expertise. The firm is headquartered in Camarillo, Calif. with an office in Los Angeles.