Wednesday, August 09, 2006

The Final Evacuation

The final evacuation of the coast will come not because of named storm, but because corporate America has run completely off the tracks. The tempest that will lead to the collapse of places like New Orleans and Tampa-St. Petersburg and Miami will bear a name like Allstate or State Farm.

In the last two years of record hurricanes, insurance companies have made recover profits. The LA Times reported in April that property and casualty companies made a $44.8 Billion profit last year, and increased reserves by by more thn 7% to $427 Billion.

Among insurers, the consensus is that the industry is in the best shape it has been in years. Some argue against tampering with success."We've been through some of the worst natural disasters and man-made catastrophes in our history, and had some of the best earnings in the last 20 or 30 years," said Frank W. Nutter, president of the Reinsurance Assn. of America, a Washington trade group.

An analyst talking to MSNBC concurs: “The industry has managed the massive losses of the 2005 hurricane season and is enjoying the profits and healthy balance sheets that have resulted from a continued hard market,” said Standard & Poor’s analyst Simon Marshall. A hard market is one where it is difficult for customers to get insurance and insurers can boost premiums.

In spite of record profits, companies like Allstate are trying to back out of places where an insurance company might find itself actually having to pay out to the people who's premiums have fattened the company's coffers. Allstate is looking to drop wind and hail coverage for 30,000 Louisiana residents, in violation of a state law that prevents insurers from dropping coverage for customers in good standing. Allstate currently holds over 20% of the homeowners insurance market in Lousiana.

Allstate's problem is not a hurricne, but a bad business decision. According to the stories cited here, the company made a chocie not to purchase re-insurance for Louisiana, resulting in $2 billion in payouts. The issue then is, who should pay for bad business decisions, homeowners or stockholders? For Allstate, the answer is clear: they should not be held responsible for their own foolish choices. Policy holders should either face massive increases in premiums, or be cut off from insurance all together, lest profits fall below the high rates these companies have come to expect.

Louisiana is not alone in this problem. In Florida, Allstate announced in 2005 that it would drop coverage entirely for 100,000 policy holders in the wake of the storms of 2004. Another 120,00 are being dropped this year, USA Today reports. The premiums being charged their remaining Florida customers should alarm residents in Louisiana, where rates are already over 1% a year of insured value. Some Floridians are paying as much as $5,000 for a bare bones policy with a $10,000 deductible, while residents of Key West are paying as much as $15,000 a year.

And it's not just the Hurricane Coast impacted. Allstate is withdrawing from the New York market as well. The same USA Today article reports the company has announced it won't write new policies in metropolitan New York City and won't renew nearly 30,000 policies in that region.

It has been nearly 70 years since a major hurricane struck the New York area.
Today, the insured value of coastal real estate in that area is almost as high
as that along the entire Florida coast. Allstate is most exposed among the
insurers, with a 25% market share in the New York metropolitan area.
The reason for this retreat? Greed. With industry profits of almost $49 billion and untouched reserves of almost half a trillion dollars in the indutry, there is no other explanation. In an environment of record profits and earnings in spite of the large payouts, the companies clearly feel they should be guaranteed a risk free income an income from premiums with litte or no payout. Mr. Nutter cited above tells the LAT "companies that are calling for major changes in coverage and creation of public backstop programs of engaging in 'a risk-shift strategy of moving risks off their books onto government and policyholders'."

If you're collecting money from people while shifting all of the risk and cost back to them, this isn't insurance. It's a protection racket. Pay up or the bank will take your home away, that is their entire business model. They might as well send some guy in to threaten to break our legs. Given the behavior that being uncovered by Mississippi's attorney general, the insurance companies probably aren't too far away from hiring guys to enforce their business model with baseball bats.

In the Magnolia State, State Farm was altering or forging engineer's reviews to avoid payouts in that state. The state's top lawyer has sued State Farm, Allstate and Nationwide Insurance to void the companies' attempts to avoid payouts for wind and storm damage. The companies are alleged to have forced customers to sign waivers that stated all of their losses were flood related in order to get living expense checks provided for by their policies. What does all this rackteering by the insurance companies mean to America at large?

Hood said the state faces a financial meltdown because of insurers wriggling out of paying homeowners' claims. He said many Gulf Coast residents are ready to salvage what little they can and walk away from their homes, leaving the insurance companies and banks to fight over the remains.

A mass exodus will likely cause the financial collapse of many banks,
businesses, cities and counties on our Coast and severely damage the Mississippi
economy, Hood warned.
And that is precisely what Allstate is threatening to all along the coast, withdraw from any area of risk. It is already almost imposssible to purchase insurance down here. I learned last night that the one insurance company that was writing policies when I purchased my house last February is no longer writing new policies. The only place to purchase insurance is the expensive and bankrupt state insurer of last resort. As a result, my already sky-high premium is likely to be socked with a surcharge to keep the state's insurance pool afloat.

When the insurance companies complete their retreat from the coast, when no one else can come home and no business can open or reopen because no one will write insurance, the results will be as catastrophic as Hood warns. The collapse of the Hurricane Coast won't just be isolated to one state or even just the Gulf Coast. It could trigger the next Great Depression, as banks and businesses collapse all along the coast and the port and oil companies are unable to function in the region. The price of energy would skyrocket and the farm economy, unable to export, would collapse. When people can't afford to heat their homes or gas their cars to drive to work in the safe interior, when they can't earn enough to pay their premiums, how precisely will that serve the interest of Allstate's stockholders? What is it's business plan for a future in which the company has destroyed the very economy it exists to leech upon?

Corporate America has run off the tracks, and the insistence of Allstate that the insurance business be made free of risk that might interfere with profit is a perfect example. Like the health care industry, insurance does not operate in a truly free market. The companies involved have figured out how to game that system to their advantage and our loss. It's time to move beyond the old model of insurance as a private business, or to radically rewrite the rules so that we are dealing not with state-by-state and company-by-company risks, but with national insurance pools. State insurers of last resort aren't working. The rates are too high becaue the pools are too small, and any attempt to spread the risk is kept in state, pushing up all rates astronomically. It's time to have one national insurance program for hurricane damage as a starting point for breaking up the insurance racketeers.

I can hear the anti-government naysayers rallying in the wings already, but I'd ask them: when was the last time you missed getting your Social Security check (post-flood mail service not included)? Of all of the insurance payments or other compensation such as SBA, which was the quickest to payout? Its clear the so-called free market has failed in the insurance business, which is not longer a business balancing risk and profit but a racket set up to skim money off the economy in ever increasing amounts. It's time for an alternative.

Is there any national insurance company not behaving reprehensively? It's time for me to renew soon, and I'd rather give my money to the least shitty company.
Liberty Mutual has been very fair with me and my husband. They are also one of the few companies that willingly extended their deadline. I have no doubt that others had problems with them (people had problems with all of the companies)but our experience was very positive.

We were able to pick up a "loss of use" check in Shreveport with no hassle. They had an adjuster there in early october. They have paid all of the supplementals without many questions. We were lucky and did not flood but did have damage from trees and wind and they were not bad to deal with.
Excellent post. The answer is insurance is a regulated business.

Until it hurts the lenders, who have equal power, the little guy gets screwed.

Is this situation hurting the lenders?
When the banks have to start calling loans on people who can't afford their note and insurance or simply can't get insurance, perhaps then someone will pay attention. We may find ourselves in the same boat as farmers in the 1980s, trying to bodily block evictions in the same way the blocked auction sales.
This problem really requires some multi-state or federal pressure to coerce insurance companies into not just behaving better, but actually living up to the terms of the contracts they write. If they're just going to collect money without offering compensation, then it's nothing more than an organized crime "security" racket. It's time to hit 'em back!
Excellent post. Thanks.

It sounds like we might on the brink of a change in the disgusting criminal acts of these fat,happy,cold-blooded bastards.

Even though thousands of people know about and/or have experienced dealing with these sob's, this crime cannot go on.
Tnanks, Jaime -- I'll look into Liberty Mutual.
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