Insurers Got $81 Billion in Decade: GAO : Liability Losses Didn’t Prevent Huge Profits, Study Shows
The insurance industry, despite its complaints of losses on medical malpractice policies and in other areas, has been as profitable as many other major industries over the last decade, the General Accounting Office said today.
Assistant Comptroller General William Anderson told a House Energy and Commerce subcommittee that the property-casualty insurance industry apparently earned billions of dollars from 1976 through 1985 despite losses on various forms of liability insurance.
Estimates of the extent of the industry’s profits and losses vary widely according to which methods are used to calculate the reserves set aside to handle future payments.
Subcommittee Chairman James J. Florio (D-N.J.) said the GAO report “casts doubt on the justification for the tremendous rate increases in the troubled lines (of medical malpractice and general liability insurance).”
At a separate hearing before the House Small Business Committee, Frank Swain, the Small Business Administration’s chief counsel for advocacy, testified that liability insurance problems have had a “devastating effect” on small firms. Some find it impossible to buy insurance at any price; others are forced to cut payrolls or curb expansion in order to pay their premiums, he said.
The GAO’s findings for the years 1976 through 1985 showed that the property-casualty industry earned $81 billion in after-tax income despite underwriting losses of $65 billion. Subsequent data from the Insurance Information Institute and calculations by the GAO placed 1986 earnings at $19 billion, up from $9.7 billion for the previous year.
The GAO, using its preferred method of calculations, said the medical malpractice insurers’ profits from 1975 through 1985 probably were between $1.6 billion and $2.2 billion.
The office also developed another estimate, which Anderson said “does not in our view present a completely accurate picture,” that shows losses ranging from $653 million to $1.8 billion.
In that second estimate, reserves were not “discounted”--or calculated by considering the additional money that would be raised by investing the funds until they were needed to pay off claims.
The office performed similar calculations for general liability insurance, showing profits ranging from $6.7 billion to $8 billion if reserves were discounted. Without discounting, calculations ranged from profits of $2 billion down to losses of $462 million.
“Despite faring poorly in recent years, the industry’s profitability in terms of its rate of return on net worth (from 1976 through 1985) . . . was comparable to that of other industries, such as the banking, transportation and utility industries,” Anderson said.
But an official of the Insurance Services Office, a not-for-profit corporation that provides technical services for the industry, said insurers managed significant financial improvements last year but continued to lose money on medical malpractice and general liability.
