Risky Business
Big insurers rig the game to avoid covering people likely to file claims
The plans are a windfall for insurers for several reasons: They can write policies offering less coverage at higher prices, spread losses among participating companies, and win tax subsidies from state legislatures. Insurance executives say the plans work well and provide a vital safety net for a small segment of high-risk policyholders who otherwise might have no coverage at all. It is factors beyond the industry's control, they say--such as higher costs for fraud, medical care, or legal damages, or oppressive regulation--that hold down profits and premiums, forcing companies to turn away high-risk customers. "It's not that we're dodging risk," says Larry Akey, communications director for the Health Insurance Association of America. "It's that we don't want to take on sure losers."
Although the special plans are billed as markets of last resort, they're actually commonplace. And with their growth, many more Americans are learning that their insurers consider them to be losers. There are no comprehensive statistics, but the number of customers in these plans varies, typically from several percent to perhaps 10 to 15 percent of the total market for a given kind of insurance. In specific locales, like Boston's Dorchester and Roxbury neighborhoods, the figure runs to half or more of all policyholders. The plans cover the commonplace, like home, health, and car. They're used in the disaster business, to provide coverage in case of flood, hurricane, or earthquake. But they can also be found in just about any niche--including crop loss, nursing home liability, black lung, underground storage tanks, harbor and shipworker injuries, building atop abandoned mines, or even bars when people drink too much.
In auto insurance, applications for special plan coverage reached 1.1 million for the year ended September 2002, up nearly 120 percent over two years. Among homeowners, applications for new special plan policies climbed by about 80 percent, to 104,000, in 2001. Another sign of expansion: Years ago, special plans for homeowners covered urban areas where insurance was tough to get following 1960s and 1970s rioting. Today some plans have expanded beyond "blighted areas" to encompass entire states. And special plans' exposure to potential hurricane losses along the East Coast soared to $112 billion in 1999 from $17 billion in 1992, as property insurers pulled up stakes to avoid losses.
Double trouble. On the job, special plan policies for workers' compensation can cost more than twice as much as regular coverage. Premiums paid by companies in such plans more than quadrupled from 1999 to 2002, to an estimated $2.4 billion. Why? Insurers are "making business decisions: Which risks do we want to keep? Which risks do we want to keep at higher prices?" says Peter Burton, of NCCI Holdings Inc., an industry-aligned private company influential in setting rates.
Even more people could find themselves forced to purchase coverage from special plans. New information technology allows insurers to weave together vast amounts of data--credit histories, criminal information, personal data, claims information, and more--to draw ever finer statistical portraits of policyholders and would-be customers, assessing the likelihood they'll file a claim or shop around for competitive coverage. "Insurance companies have radically changed the way they underwrite and segment the market," says Birny Birnbaum, executive director of the Center for Economic Justice in Austin. And with that, he warns, comes the ability to cull those seen as losers.
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