The Texas Department of Insurance recently released home insurers’ 2007 loss ratios (the amounts of premiums insurers paid for claims). The 2007 industry average was 36.5%.
Consumers groups cry foul, saying insurers reap profits by overcharging policyholders, but loss ratios do not include the amounts insurers paid out in expense. Adding expenses gives you the combined loss ratio (preliminary estimate: 70.6% for 2007). Also, today’s profits equip insurers for tomorrow’s losses. Insurers must maintain a long-term focus if they want to be able to cover the large losses that hit policyholders from time to time.
If insurers cannot charge enough to cover the risk they insure, the industry is left overexposed and underfunded. The Texas Windstorm Insurance Association is a prime example: Because of inadequate rates, TWIA policyholders increased from 68,756 in 2001 to 217,374 at the end of January 2008; TWIA’s total exposure to potential claims is currently $64.9 billion. However, TWIA member assessments and the Catastrophe Reserve Trust Fund can only cover about $1.7 billion of losses, much less than the potential losses from major hurricanes. Taxpayers are on the hook for the rest.
Insurer profits versus taxpayer losses…which would you choose?