The Truth About Insurance Company Expenses
Courtesy of Texas Watch
How the insurance industry pads its bottom line Recently, the insurance industry and groups affiliated with the industry have been asserting that insurers in Texas are losing money, despite clear evidence that Texans are being overcharged. They are basing this assertion on figures known as the “combined loss ratio.” This measurement includes expenses like reinsurance, CEO pay, and fees paid to out-of-state parent companies. A better measurement is the “pure loss ratio” which is the actual amount insurers paid in claims for losses in Texas. The “expenses” used to calculate the combined loss ratio are difficult to ascertain; however, we do know how some of these costs which are passed along to policyholders are determined.
Self-Dealing Reinsurance Contracts Insurance companies typically obtain insurance for themselves. This is known as reinsurance. These reinsurance expenses comprise 6-12% of the premium on an individual’s homeowners insurance policy. However, reinsurance has extremely low loss ratios typically 20-25% meaning that three-fourths of reinsurance is profit and expenses for the reinsurer. This is in addition to the profit and expense already built into what the customer pays the company writing the homeowner’s policy. The insurance industry is expending a great deal of time and energy to keep information about their reinsurance arrangements from the public. However, many of them, including State Farm, purchase massive amounts of reinsurance from their parent company. In other words, the companies that engage in these self-dealing reinsurance arrangements are essentially double dipping by padding premiums with expenses and profits twice. The Office of Public Insurance Counsel has labeled these self-dealing reinsurance arrangements “suspect.”
Out-of-State “Management” Fees Insurers with out-of-state parent companies routinely pay so-called “management fees” to the parent company for underwriting operations. Essentially, these companies outsource the operations to the parent company at a substantial profit to the company. This is classified as an expense. In other words, insurers are labeling underwriting profits as an expense to pay the parent company, thereby padding the amount of profit that is considered acceptable by regulators. Like self-dealing reinsurance arrangements, this is simply moving money from one pocket to another.
Burdensome Expense Allocations Multi-state insurers typically allocate expenses (i.e. executive pay, overhead, administrative costs) to their state-based affiliate companies using a formula based on premium volume not number of policies written. Since rates in Texas are so much higher than most other states, a disproportionate amount of the corporate expenses are paid by Texas consumers.