Insurers Hide Profits in Books, Rosenfield Says

California auto insurers have used bookkeeping tricks to hide millions of dollars in excess profits that should be returned to customers under the provisions of Proposition 103, the leader of the group that put the insurance regulation initiative on the ballot said Wednesday.

Harvey Rosenfield, chairman of Voter Revolt, said a new study by the group shows that four California-based insurance companies held about $430 million more in reserves in 1988 than they needed to cover losses on policies written that year.

If the money were used for the rollbacks mandated by Proposition 103, policyholders would receive rebates of as much as 24%, Rosenfield said at a news conference.

“Over the past five years, they (insurance companies) have been making money hand over fist at the same time that they have manipulated their books to make it look as if they are losing money,” he said.

At issue is how much money the insurance companies can legitimately keep in reserve to pay claims not yet processed. The companies’ reserves are not counted as profits. In fact, if the reserves are kept high enough, they can make it appear on paper that a company has lost money even if its income from premiums is far greater than the amount it pays out in claims.

Consumer advocates have been charging for years that insurance companies hide their profits in reserves while the industry asserts that healthy surpluses are necessary to guard against unknown future losses.

George Tye, vice president of the Assn. of California Insurance Companies, said the Voter Revolt study failed to recognize that insurance company reserves are “under constant review” by the Internal Revenue Service, the Securities and Exchange Commission and state insurance regulators.

Rosenfield said a study of the four largest California-based auto insurance companies shows that the firms increased their reserves by 157% from 1984 through 1988, while actual losses only increased by 69% during that period. For 1988, he said, the four companies held about $1.25 billion in reserve when they actually needed only about $823 million to cover future losses.

The companies studied were the California State Auto Assn., the Auto Club of Southern California, Mercury Casualty and 20th Century.