Risky Business
Big insurers rig the game to avoid covering people likely to file claims
After food and shelter, insurance is one of Americans' biggest expenses. So these special plans, also known as "involuntary markets," are just the latest burden for those who have no choice but to buy insurance if they want to own a home, drive a car, or run a business. Today, the simple act of filing a loss or damage claim with an insurer can result in higher rates or policy cancellation. In several states, including Florida, West Virginia, and New Jersey, doctors have gone on strike to protest the cost of malpractice policies. Homeowners are suffering double-digit premium hikes, and businesses face higher outlays for covering on-the-job injuries. Yet over the past decade, the insurance industry has ranked among the most profitable in America. And one way it boosts the bottom line is by forcing more high-risk insurees into special plans.
Although created by state and federal law to serve the public, special plans are often masked by secrecy. Many refused to provide even basic information to U.S. News, including names of board members or how they spend their money. The magazine's review showed, however, that many plans are dominated by insurance executives. Some refuse to provide audits to the public. Others engage in no competitive bidding.
There are, not surprisingly, two views of these special plans. "Under the table and out of the public eye, incredible amounts of money are being shifted around that have huge impact on people's lives," says Martha McCluskey, a law professor at the State University of New York-Buffalo. But David Snyder, vice president of the American Insurance Association, a trade group, says it's appropriate for the industry to run the plans, because its executives know the business and can regulate themselves.
Untouchables. "No one's going to touch those people," says Robert Black, a spokesman for the Texas Department of Insurance, acknowledging the thousands of homeowners whose claims for mold and water damage in the past several years have thrown the Texas homeowners insurance market into chaos. In response, Farmers Insurance Group--which last year reached a $100 million settlement with state regulators for alleged overcharges and deceptive practices--threatened to pull out of the state. So Texas launched a stop-gap special plan to cover homeowners, under which taxpayers could ultimately be responsible if losses are heavy. "We realized we had to spread some kind of safety net under the existing market," says Black.
The Texas case illustrates the way powerful insurance companies seek to position themselves to cover people who don't file claims, while forcing policyholders or the public to pick up the tab for the biggest losers. It works like this: People and companies must have coverage, either by law or other requirement. Insurers refuse to cover those they judge to be too unprofitable or too inconvenient to serve. Under pressure, lawmakers then create a special plan. Usually, this means companies band together to provide coverage for those denied it, and the special policies typically provide less coverage, a bigger premium, or both. "If you're in the involuntary market," says Tim Ryles, former Georgia insurance commissioner, "you're paying through the nose."
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