Risky Business
Big insurers rig the game to avoid covering people likely to file claims
On a crisp, clear Saturday morning, two dozen people huddle in the drafty back room of a cramped community center in the Dorchester section of Boston. Mostly blue-collar African-Americans, they are learning how to become good, re liable homeowners. During a daylong class, they listen to an insurance agent and other experts. One goal: to make themselves more attractive to insurers.
In this ethnically mixed area, more than half of all homeowners strike out. A generation ago, the area was risky, its gritty streets troubled by crime and violence. But today, new shops are opening, traffic hums, and homes--including the area's signature "triple-deckers," with gilded trim--are selling briskly. Yet first-time home buyers like Diallo Ferguson, a 29-year-old Boston University financial administrator, find themselves tossed into a last-resort insurance plan set up by the state, which offers many of those it insures less coverage or higher premiums--and, sometimes, both. "I really don't understand why that's still happening," Ferguson says. "It's almost like you're obligated to go with that plan if you're in a certain area. That doesn't seem right."
Today, the risk business is increasingly too risky for insurers, and unsuspecting people like Ferguson are paying the price. What's happening in Boston has happened all over the country: Big companies have lobbied legislatures to create state-sponsored--but industry-run--plans to corral customers they don't want to handle. Then, with those risks isolated, the companies provide insurance to the customers they do want. Insurers "are the ultimate risk avoiders," says J. Robert Hunter, a former industry regulator now with the Consumer Federation of America. "If there's any hint of risk, they dump out of it."
In a four-month inquiry, U.S. News examined the increasing use of these special plans, which number in the hundreds and have become an industry in their own right. The findings:
Across the nation, thousands of individuals and businesses are being forced into special plans, as insurers are increasingly turning away those seeking auto, home, and workers' compensation insurance. Existing plans are growing, while new ones are being created. But in some cases, notably medical care, special plans are full, and people are being turned away--with no coverage.
The plans allow insurers to offload huge costs by putting policyholders or the general public on the hook for losses, or by using taxpayer money to pay plan costs. Meanwhile, tax exemptions granted to the plans mean that taxpayers effectively pay the price when insurers avoid risk and abandon unwanted customers. In Florida and California, for example, special plans created for hurricane and earthquake risk require the public to shoulder liability for billions in potential losses, and tax exemptions deprive the federal treasury of hundreds of millions of dollars a year. State tax breaks shore up insurers' bottom lines still more.
Although some companies are unwilling to take on risky consumers, they're perfectly happy to provide risk-free administrative services to the plans--for such things as issuing policies and processing claims--at often hefty rates. This business is so lucrative that some firms prefer it to actually writing insurance (box, Page 47).
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