An Insurance Scam that Affects Us All

We are being fleeced by film-flam artists.

The absurdity of a requested 100% rate increase for some North Carolina property owners got my attention. (Note that insurance PR people knew that 100% might sound unreasonable, so they adjusted it to be 99.4%!). Let’s back up a bit to see what’s going on here…

Every one of us pays for insurance, one way or another. Some of the most common types of insurance related to property are: homeowners, flood, wind, earthquake, umbrella, tenant, etc. Since what we pay is supposedly related to such matters as actuarial calculations, most of us believe that there is little we can do to complain about our premiums — as what would be the business basis of our argument?

I’ll try to answer that key question…

Note: this issue can get very complicated quite quickly, so this is a layperson’s overview. (FYI: when discussing rates, obfuscation is often a tactic purposefully employed by the insurance industry.) For simplicity, I’ll primarily talk about flood insurance. For those readers who have joined recently, you may have missed an earlier commentary I published on the flood insurance fiasco. Please reread that. I’m writing this update to focus on one unappreciated major development.

A profoundly significant change has happened in the property insurance business over the last decade or so — and almost no one is discussing it! The most fundamental property insurance question is: how is future risk calculated?

Traditionally (i.e., for as long as property insurance has been offered), future risk has always been primarily calculated based on PRIOR HISTORY.

For example, if your property is located near the ocean, river, etc., the insurance company’s estimate of the likelihood of your property flooding in the next year, was based on the average prior history. In other words, if your property was flooded once in the last hundred years, the future estimate for flooding risk would be 1/100 (1%) per year going forward.

All things being equal, that not only makes logical sense, it was also the basis for almost all insurance companies being profitable. That, in turn, resulted in FEMA et al being careless regarding underwriting policy conditions, actuarial flood rates, etc.

So along came a perfect storm: climate alarmism (and their government enablers) plus Katrina. Insurance companies saw this motley pairing as an exceptional opportunity to increase their profits: they scrapped historical data as being the basis for our rates.

NOW, future risk is calculated based on a computer program. Worse, this program incorporates some undeclared, undocumented, and unproven assumptions!

This is a revolutionary change, that is ripe for self-serving manipulations by the insurance industry. For example, using the traditional methodology, a homeowner could always choose to research prior history. They would then know for certain whether it was accurately reflected in calculations of future projections.

With the current methodology of everything done by a computer (and operated by men behind the screen), no homeowner (or anyone else — including watchdogs) has even a remote chance of double-checking hardly anything.

Insurance regulators wouldn’t normally allow such a change simply to make insurance companies more profitable. So the insurance industry shed crocodile tears while using Katrina and Climate Change as a double-barreled shotgun, to blast away any semblance of actuarial sensibility or accountability.

Rather than fix the multiple serious deficiencies with the FEMA flood insurance program, it’s much easier just to charge everyone more. (Again, I’m just using flood insurance as an example.) Consider that NC homeowners are being targeted with an average of 42% rate increase, for homeowners insurance (NOT flood insurance).

It’s all traceable to the same issue: calculating rates based on historical results is old school. Now, an unaccountable computer program is used to project future risk.

Critical-thinking citizens should be strenuously objecting to their state and federal representatives about this greedy and unaccountable sleight-of-hand.

Some articles of interest:

• Spotlight on: Catastrophes – Insurance issues
• Supreme Court Upholds Hurricane Katrina Fraud Verdict Against State Farm
• Katrina: Federal Failures
• Is Federalism the Reason for Policy Failure in Hurricane Katrina?
• The White House Report: Lessons Learned from Katrina
• The National Flood Insurance Program: Factors Affecting Actuarial Soundness

Copyright. John Droz, Jr.. All rights reserved.

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