It’s a Dog’s Life in Insurance : Make No Bones About It, Rates Are Going Up
Insurance rates have become an economic mystery, in the same league as movie studio profits and stock market performance. Experts can’t predict them, and after they happen, experts can’t explain them, at least not in a way that outsiders might understand.
The standard economic theories sound good, but they have never proved useful for predictions. For years, the most accurate benchmark in predicting the future of the economy was women’s hemlines. My college professors had to concede that it was statistically correct--if not logical or analytical--that when women’s hemlines went up, the economy boomed, and when hemlines went down, the economy sank into recession. For me, finding this out was the economics equivalent of discovering that chicken in Tennessee who picks 85% of pro football games within the point spread, putting all of the human experts to shame. Who needs logic or analysis when you’ve got a good hemline or a good chicken?
Wouldn’t it be wonderful if there were a similar benchmark for predicting insurance rates? They don’t even reflect claims and losses. How else explain five-fold annual rises in insurance premiums for day-care centers, when some entire states don’t show a single claim?
One searches in vain for the cause of rising rates in a field that has become almost mystical. Insurance is an industry built on marvelous accounting stratagems that go by such magical names as “IBNR reserves.” This refers to claims incurred but not reported--which is to say, claims about which the companies know nothing. IBNR reserves are often inflated by the insurance companies at tax time to eliminate even the slightest chance they’ll have to pay any taxes--or lower their rates.
Similarly, logic would dictate that after thousands of claims are eliminated, as was done through Proposition 51 (the so-called deep-pockets initiative), rates would go down. They didn’t. It would seem obvious that drastically cutting the rights of the victims of malpractice would lower those rates (the doctors’ so-called reform legislation). They didn’t. It would seem that the billions in accumulated, unspent funds from high-rate premiums would allow rates to drop. They don’t. It would seem that court congestion, which forestalls theday when insurance companies have to pay a claim, would lower rates. It doesn’t. Huge profits should tend to foster competition, even in an industry that is exempt from antitrust control. It doesn’t.
There seems to be no logical way to justify high rates. Intellectual sweat yields nothing helpful. One literally cries out for the help of a hemline or a point-picking chicken.
It was only by sheer luck that I recently discovered the key to insurance rates, the economic hemline, if you will, of rate prediction. Our dog barked, and insurance rates went up.
I was unsure at first that this was a statistically significant observation, but I’ve tested it again and again, and it truly does seem to work. Our dog even outdoes the 85% accuracy rate of that point-picking chicken; our dog is batting a thousand. This means I can now state with statistical assurance that every time our dog barks, insurance rates go up. This is of no small consequence, since our dog barks a lot--at the moon, at shadows, at clouds. Our veterinarian says she’s just doing what comes naturally. So, say the cynics, are the insurance companies.
Well, you say, what about four years ago when insurance companies were actually competing and lowering rates instead of raising rates? Simple. We did not then have this particular dog. Four years ago we had an old dog that had long since given up barking. Even at his virile, youthful best, that dog didn’t have a killer instinct about insurance rates. It’s only this new dog that seems to be the real McCoy. She barks all the time. At first only the neighbors complained, but now even the insurance-buying public is complaining. This dog has real power.
I should close with a caution about my latest experiment in this new field of rate prediction. Know-ing that the public was going to be confronted with about 100 initiatives on the November ballot, and that their insurance rates were going to be seriously affected by at least five or six insurance-company backed initiatives, I decided to subject them to my dog test.
I’m sorry to report the results, because the public is hungry for some good news. Even after I explained the no-fault initiatives to our dog, and even after I reminded her that they must assuredly cut rates, since they would cut off a tremendous amount of victims’ compensation and virtually eliminate claimants’ rights to counsel by destroying attorney fees--even after all that, our dog concluded that, just as happened in all those other states that passed no-fault, rates will go up in California.
Thinking my explanations of the initiatives may have been slanted, I decided to use the actual wording of ballot initiatives. I took a couple of the propositions on no-fault insurance and limitations of attorneys’ fees and read them to our dog. At first our dog tilted her head, which she does whenever she’s spoken to in Spanish. (She is not bilingual.) But as soon as I started to read the insurance propositions in English, her head assumed its normal vertical position, her eyes lit up, her tail wagged and--you guessed it--she barked.
I couldn’t even make it through the first six paragraphs before our dog started growling. By the time I got to the fifth initiative, she was in a barking frenzy. I finally threw down the initiatives in disgust and our dog immediately tore them to shreds. This was most unusual; to this very day, she’s the only living organism that I’ve encountered that was willing to listen while I read all of the fine print.
In short, our dog doesn’t like a single insurance-company initiative, I’m sorry to say. She barks all the time, and sometimes she even growls. But, from the tone, I’d say she’s still not seeing rates go down.
And if you don’t believe our dog, check out that chicken, or the fall fashion predictions. Don’t try logic; it won’t work.
