California homeowners’ insurance companies may be making “excess profits,” because their payments on claims have dwindled in the past two years while the money they keep has “soared,” according to a report released today by the state’s insurance commissioner.

Beginning in 2004, loss ratios – the amount an insurer spends to pay the claims of its customers, as expressed as a percentage of its premiums – for homeowners’ insurers dropped “markedly,” according to the study commissioned by California Insurance Commissioner John Garamendi. The study also addressed auto insurance.

The commissioner said he would hold a rate reduction hearing July 20 to determine whether some of the rates consumers are paying are excessive and whether homeowners’ and auto insurers should be ordered to lower their rates.

“Only four (homeowners’ insurance) companies reported loss ratios exceeding 50 percent in 2004, and only five companies were in this category by the end of 2005,” Garamendi said in a statement. “These companies are paying only 25 to 30 cents on claims for each dollar of premium they collect. The other 70 to 75 cents pays for administrative expenses and goes to the bottom line as profit,” Garamendi said.

According to Garamendi, “while companies eagerly filed applications to increase rates during periods of higher losses, there was no corresponding race to reduce rates as loss ratios tumbled.”

Because of the low loss ratios, Garamendi said he believes profits and rates may be excessive, and consumers should be paying lower premiums.

“The report I release today focuses on an important measure of success or failure for insurers, called loss ratio. The loss ratio is a fair measure of the value of an insurance product from a consumer perspective. In the simplest terms, a loss ratio represents what an insurer spends to pay the claims of its customers, expressed as a percentage of its premiums,” Garamendi said.

For instance, if a company collects $100 dollars in premiums and spends $40 of these premiums on customer claims, the company has a 40 percent loss ratio, the commissioner said. This is important to understand, because the bottom line is that lower loss ratios translate to higher profits, according to Garamendi.

“As I indicated earlier, I am very concerned by what I am observing as a trend over the last two years. Beginning in 2004, loss ratios dropped markedly in the homeowners’ insurance market in California. Only four companies reported loss ratios exceeding 50 percent in 2004, and only five companies were in this category by the end of 2005,” Garamendi said.

In 2004, when we began to see such significant drops in loss ratios, I directed my staff to continue to monitor the trend for one more year to determine whether these results were merely an aberration,” Garamendi said. “We have recently completed our review of 2005 data and confirmed the trend continues. In fact some low loss ratios have declined even further.”

According to Garamendi, the lowest loss ratio reported in 2004 for the top 20 companies was 24.2 percent, while another company’s loss ratio declined from 49.8 percent to 27.8 percent between 2004 and 2005. Garamendi claimed that these companies “are paying only 25 to 30 cents on claims for each dollar of premium they collect. The other 70 to 75 cents pays for administrative expenses and goes to the bottom line as profit,” the commissioner said.

“In my view, some of the low loss ratios we are witnessing are an indication that profits and rates are excessive, and that consumers should be paying lower premiums,” Garamendi said.

The commissioner said private passenger auto insurance “presents a similar picture, even though the loss ratios we are seeing are not as low as those we have observed in the homeowners’ market.”

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Send tips or a Letter to the Editor to janis@inman.com or call (510) 658-9252, ext. 140.

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