Risky Business
Big insurers rig the game to avoid covering people likely to file claims
When insurers abandon the field--as they did in Florida after Hurricane Andrew stomped across the state in 1992, causing about $16 billion in insured losses--the public stands to lose. Florida created a special plan in 1992, which quickly became one of the state's biggest insurers, with about 937,000 policies. Alarmed that the plan had become too risky, officials decided they needed to move many policyholders back into the regular insurance market. Trouble was, insurers didn't want them. So, since 1995, the plan has paid private insurance companies about $130 million in bonuses to get them to provide coverage. Similar incentives are common in plans across the country. West Virginia went as far as providing taxpayer subsidies to doctors, to cushion higher malpractice premiums.
Florida also offered companies another sweetener. In 1993, the state created a "reinsurance" fund--essentially, insurance for insurance companies, to cover losses in case of a big payout to policyholders. But Florida offers its reinsurance coverage at about a half to a third the price it would cost insurers in the marketplace--a discount worth perhaps a billion dollars a year. "It's a tremendous bargain," says Jack Nicholson, chief operating officer of the reinsurance fund, called the Florida Hurricane Catastrophe Fund. Florida regulators claim that providing insurers with cheap reinsurance helps keep the lid on premiums. Consumer advocates scoff. "They never pass along any benefits to consumers," says Bill Newton, executive director of the Florida Consumer Action Network. "It goes right to the bottom line."
Both the Florida special plan for property insurance and the back-up reinsurance fund enjoy federal tax-exempt status. In effect, that means U.S. taxpayers subsidize insurers' decisions to walk away from the market, to the tune of about $215 million a year, an amount that will grow over time. Neither the plan nor the fund pays state tax, either.
Cocktail hour. Insurers cash in in other ways, too. In North Carolina, for instance, dozens of insurers that refused to write policies along the coast and in other underserved areas received at least $85 million in payments from surplus plan funds. Firms that did provide coverage--and, under plan rules, were therefore not eligible to divvy up the surplus--didn't cash in. "Weird, isn't it?" says Dascheil Propes, chief deputy commissioner of the North Carolina insurance department. "I don't know if that [money] went to cocktail parties, presidents' bonuses, or what." Today, there's about an additional $175 million surplus built up, and state officials are questioning insurers on the legal authority to pay the money to themselves. "When the wind doesn't blow," says Propes, "they make gobs of money." Donald Stauffacher, an executive of the plan, confirmed the general arrangement but declined a U.S. News request for details.
Backed by trillions in assets, insurers have long been a potent lobbying force, in state capitals around the country and in Washington, D.C. Last November, after a yearlong lobbying campaign, the insurers persuaded Congress to grant them $90 billion a year in taxpayer protection against new acts of terrorism. The industry also has a decades-old antitrust exemption that lets companies collude in what otherwise would be illegal price fixing when determining premiums. For many decades, insurers have fended off comprehensive federal oversight in favor of looser, less-sophisticated state regulation that's more vulnerable to lobbying and campaign cash.
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