Companies that don't offer coverage still turn a profit
Such A Deal
Big profits and no risk--it's one of the choicest benefits for insurers in government-backed plans set up for those denied coverage in the regular marketplace. Insurers don't want the risk of taking on these people and businesses, but they're content to handle administrative chores--for a nice fee, of course.
The industry's refusal to provide basic flood coverage, for example, has essentially made the government the only game in town. Under the National Flood Insurance Program, run by the Federal Emergency Management Agency, insurers issue policies and handle claims, but the government assumes the risk.
Fine print. The program has cost taxpayers plenty--some $2.1 billion in direct subsidies. For doing the administrative work, insurers collect about one third of every premium dollar; in 2001, the program paid $425 million to some 90 companies. The income statement of New Jersey-based Selective Insurance Group shows how lucrative "servicing," as the practice is known, can be: In regulatory filings, the company reported pretax profit margins as high as 30 percent on its flood business.
Although the program is government-run, officials refuse to provide details of the fees paid to insurers. Howard Leikin, an administrator, says that's to protect insurers, because releasing the information would allow competitors to see what others are doing. He says fees could be lower, and insurers could assume some risk, but that hasn't happened because firms have shown no interest.
Likewise, insurers participating in the federal crop insurance program can share in profits for doing paperwork, while the government shoulders most of the risk. In 2001, 19 companies were paid $986.1 million, an arrangement the Bush administration criticized as providing "windfall profits." Administrator Ross Davidson refuses to say which companies got what, although the agency says it's reviewing the size of payments to insurers. Some of the biggest beneficiaries of servicing fees, such as Travelers, Liberty Mutual, and Progressive, also refuse to discuss details.
In the workers' compensation field, insurers collect about 35 percent of premiums earned. In South Carolina, when the Seibels Bruce Group elected to stop writing certain kinds of auto coverage, it continued to service similar policies. In Maine, an expert estimated that the servicing fee of 26 percent recently being paid to workers' compensation insurers would provide a 50 percent return on investment. In New Jersey, insurers servicing a state plan for commercial vehicles, such as trucks and buses, get about 42 cents of each premium dollar. Yet experience shows the fees could be lower. "Some of these, you look at the numbers, and you say, `Good grief, what's going on?' " says Douglas Stratton, executive director of the Indiana Comprehensive Health Insurance Association.
Ultimately, these arrangements exist because government established "last resort" insurance plans but didn't create new organizations to make them work. So, insurers keep the lucrative servicing business, risk free. "Guaranteed profits and no exposure--that's a good deal," says Mila Kofman, assistant research professor at Georgetown University and a consumer advocate. "Wouldn't you like to get a deal like that?" -Christopher H. Schmitt
This story appears in the June 2, 2003 print edition of U.S. News & World Report.
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