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Insurance Industry Defends Itself Against Claims of High Profits

April 21, 1987

WASHINGTON (AP) _ The insurance industry, defending itself against charges of reaping unreasonably high profits while boosting premiums, told Congress Tuesday that it has faced rougher economic conditions than many people think.

The industry’s defense came as lawmakers examining why insurance has become unaffordable for many businesses were told that insurers earned $81.1 billion during the decade ending in 1985, and that small companies were particularly hard hit by the crisis.

Mavis Walters, senior vice president of an industry group, Insurance Services Office, conceded that insurance companies’ incomes ″may seem quite large in absolute terms.″

But he told the House commerce, consumer protection and competitiveness subcommittee that the insurance industry only slightly out-performs other industries in good years, while dramatically under-performing them in bad years.

″It is clear from our analysis that insurer profitability has generally been less than average,″ Walters said in his testimony.

He also noted that 15 insurance companies became insolvent last year, and 56 went out of business in the last three years.

But William J. Anderson, an assistant comptroller general of the General Accounting Office, who conducted a study of the insurance industry’s profits from 1976 to 1985, contested that view. The GAO is Congress’ investigative agency.

″Despite faring poorly in recent years, the industry’s profitability in terms of its rate of return on net worth over this 10-year period was comparable to that of other industries, such as the banking, transportation and utility industries,″ Anderson told the legislators.

Anderson said the insurance industry lost $64.8 billion during the decade examined from the policies it underwrote.

But during those same years, the industry more than offset that loss by earning $144.3 billion by investing its capital, and collecting $1.6 billion in federal tax refunds and future tax credits, Anderson said.

″This ... casts doubt on the justification for the tremendous rate increases in the troubled lines″ of insurance, such as medical malpractice, said Rep. James Florio, D-N.J., chairman of the subcommittee.

Anderson said that he expected the insurance industry to have earned $19 billion last year. Walters, computing the figure differently, said the earnings were $12.7 billion, and argued that the rate of return was only slightly higher than the median return for Fortune 500 companies in 1986.

″In fact, insurers were in the bottom third of industries in profitability, even though the variability of insurers’ earnings indicated greater risk than most other industries,″ Walters said of the years 1970 to 1985.

At a separate hearing held by the House Small Business Committee, Frank S. Swain, a counsel for the Small Business Administration, said an agency study has found that small businesses have been particularly hard-hit by the insurance crisis.

″While businesses of all sizes have experienced difficulties, small businesses have reported greater financial impact in responding to insurance deficiencies,″ Swain testified.

Swain said that in 11 industries surveyed, small businesses were significantly less likely than large companies to have had a liability claim of $1,000 or more from 1981 to 1986.

″This finding suggests that whatever the cause for the high cost and scarcity of liability insurance, it does not appear to be the claims experience of small business,″ he said.

Raymond L. Hayes, president of the National Association of Insurance Brokers, told the lawmakers that some coverages remain difficult to find, including doctors’ and lawyers’ malpractice and protection for chemical and pharmaceutical manufacturers.

But he said premiums are leveling off and in some instances even dropping and added, ″The picture is much brighter than in 1986.‴

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