Industry Accused of Unfair Pressure Tactics to Cut Liability : Consumer Advocates Hit Insurers

Consumer advocates charged Monday that the insurance industry has misrepresented its losses and called for tighter federal monitoring of that business.

Rate hikes and policy cancellations affecting many businesses are an attempt to pressure state legislators into reducing liability and thus reduce the protection for injured persons, charged former federal insurance administrator J. Robert Hunter, head of the National Insurance Consumer Organization.

The companies’ action is a politically motivated attempt to stampede legislators to roll back the personal-injury rights of Americans, added consumer advocate Ralph Nader, appearing at a news conference with Hunter.

The industry claims that recent rate hikes and cancellations have been justified because it had an operating loss of $5.5 billion last year, an assertion that both Hunter and Nader charged was misleading.

Hunter said the insurance industry overestimated future losses due to claims originating in the year, did not include capital gains and tax credits as income and counted dividends to stockholders as losses.

Had that not been done, Hunter said, the industry would have shown a profit of more than $6 billion.

Economist Sean Mooney of the Insurance Information Institute countered that, under the law, insurance firms must count dividends as expenses.

After taxes, he said, the industry is expected to be about $1.7 billion in the black for the year, but losses on insurance operations were in the $5.5-billion area.

As to whether the industry was attempting to stampede legislators, Mooney responded that, if that is the case, it certainly hasn’t been very successful.

Concern Over Lawsuits

But, he added, there is a concern about the increasing number of lawsuits and the growing size of awards being issued in liability cases.

Nader said that actual litigation and awards are not rising but that insurance companies are merely choosing to emphasize the occasional very large settlement.

Hunter pointed out that the insurance industry operates in cycles of high and low profit, with previous similar crises in 1965 and 1975. Nader added that, if no action is taken, a crisis can be expected again in 1995.

To cope with the problem, Hunter proposed a four-part plan:

- End the insurance industry’s antitrust exemption.

- Establish a federal insurance office to review the industry and set standards for state regulators. End the prohibition on the Federal Trade Commission investigating the industry.

- Allow product manufacturers to form pools to either insure themselves or to purchase insurance on a group basis.

- Establish a federal reinsurance program.

Reinsurance, in which a second company shares the risk with the firm originally writing the policy, is largely concentrated among foreign firms such as Lloyd’s of London, Nader said, and they have undue influence on American insurance.

Hunter suggested that having the federal government become a reinsurer, as was done in riot insurance in the 1960s, would ease this problem and help keep millions of dollars in this country.

Asked about the benefits of federal regulation for insurance, Mooney said that it might work but cautioned that the result might also be a complex system of confusing regulations such as currently apply to agriculture, which is also a cyclical business.

Asked if Lloyd’s has an undue influence on American firms, Mooney said that the company has lost more than it wanted to in the U.S. market in recent years and wants to pull back. Because it has about 15% of the reinsurance business in the country, its actions can have a major impact.