A Move to Halt the Premium Seesaw

By Albert B. Crenshaw

Sunday, September 8, 2002; Page H04

With homeowners and motorists facing hefty insurance price increases -- 100 percent higher than a year ago and more in some cases -- dozens of consumer groups have banded together to try to get the attention, and perhaps even the assistance, of state regulators in toning down the feast-and-famine cycles that characterize the insurance business.

If left in its current state of business and regulation, the consumer groups say, insurance rates are doomed to carom from too low for the companies' long-term health when times are good to excessive when times are bad. And customers will continue to be yanked back and forth without warning.

A survey last week by Merrill Lynch found that the average price for commercial property insurance was running 29 percent above last year, with some increases as high as 50 percent, according to reports from agents selling major lines of insurance. And rates are rising somewhat faster than they were early in the year.

The consensus view of the agents surveyed: Price increases will last another one to two years.

The cycles arise from the nature of insurance. In essence, life and property insurers make money by investing people's premiums, betting they can make more money on the combination of premium and investment income than they will have to pay out in claims and operating costs.

Of course, as most Americans now know all too well, investment returns ebb and flow. Currently, several life insurers are suffering because they sold variable annuities with guaranteed minimum death benefits based on assumptions about investment returns that have proved wildly optimistic.

But while both property and life insurers face investment risks, life insurers have gotten very good at predicting life expectancies and hence likely claims. Property carriers, on the other hand, operate in a much more complex world, filled with hurricanes and hailstorms, asbestos and mold, terrorists and trial lawyers.

In the personal lines of homeowners and automobile insurance, the market leader, State Farm, during much of the late 1990s was driving prices down and forcing others to follow.

Financier Warren Buffett, whose Berkshire Hathaway Inc. owns auto insurer Geico Corp. (and is a major stockholder of The Washington Post Co.), complained last year that State Farm had been "very slow to raise prices" and that "the willingness of the largest player in the industry to tolerate such a cost makes the economics difficult for other participants."

But after recording a loss of $5 billion in 2001, State Farm has "turned on a dime" and is now raising prices and refusing new business in many markets, said J. Robert Hunter of Americans for Insurance Reform, a coalition of more than 60 consumer and public interest groups that advocate regulatory changes.

Insurance is regulated by the states, and virtually all of them prohibit at least in theory rates that are either excessive or inadequate, yet the cycle continues, Hunter said in a letter on behalf of AIR to the insurance regulators in all 50 states and the District.

Regulators should use their authority to ease or break the cycle, Hunter said.

"Consumers have had enough," he said.

The letter urges a number of reforms, including more frequent audits of insurers, especially their methods of reserving for claims. Hunter said, "It makes no sense for claims to jump so severely in staid/stable old lines like homeowners and personal auto."

Leaders of the National Association of Insurance Commissioners, the regulators' national coordinating group, said recently they have looked at AIR's letter and "are recommending that the NAIC's Property and Casualty Committee . . . consider appointing a Market Conditions Working Group to coordinate the evaluation of your recommendations and to monitor the most distressed lines of business, formulate solutions, and propose regulatory responses."

It is difficult to tell how seriously they mean that. The NAIC is under pressure from some large insurers, which, in a break with the industry's past, are expressing interest in regulation at the national level. Insurers complain chronically about "excessive" regulation, and tightening at the state level could encourage them to press harder for another system into which they could jump.

Nonetheless, both commercial and individual consumers of insurance are growing restive with the current system, and the NAIC recognizes that there is a problem.

Politically the climate for tightening may be more favorable than it was a few years ago as the nation now sees the downside of many forms of deregulation, with gyrating prices and erratic service in fields ranging from electricity to air service.

Here's a surprise: More than 85 percent of financial services professionals say clients have taken investments out of the stock market and put them into more conservative alternatives in the wake of the Sept. 11 terrorist attacks and the Wall Street accounting scandals. In a survey of nearly 1,000 Farmers Financial Solutions registered agents, some 62 percent said they believe that government efforts to protect investors and prevent accounting malpractice have had no effect.

So where's the money going when it comes out of stocks? According to the survey, the most popular alternatives to the stock market are -- bank accounts.

Congress decreed in 1996 that the U.S. Postal Service should no longer have a monopoly on "timely mailing/timely filing" of tax documents, under which documents postmarked before a deadline are deemed to be on time regardless of when they actually arrive. Since then a number of private delivery services have been designated by the Internal Revenue Service as eligible for "timely mailing/timely filing."

Last week, it added FedEx International Priority and FedEx International First.

So, the eligible firms and specific services are now:

1. Airborne Express -- Overnight Air Express Service, Next Afternoon Service and Second Day Service.

2. DHL -- "Same Day" Service and USA Overnight.

3. FedEx -- Priority Overnight, Standard Overnight, 2 Day, International Priority and International First.

4. United Parcel Service -- Next Day Air, Next Day Air Saver, 2nd Day Air, 2nd Day Air A.M., Worldwide Express Plus and Worldwide Express.

Any services by these companies not on this list don't qualify. The IRS says private services can deliver to IRS service centers, but not to a post-office box.