CNBC Business Nation: Are you insured?

The insurance industry’s changing strategy is paying off. In 1992, the year of hurricane Andrew, for every dollar the companies took in in premiums, they paid out $1.27 to settle claims. By 2005, the year of Katrina, they got that number down to less than 72 cents.

In fact, according to AM Best, the authoritative source on insurance data, homeowners insurance has been a consistent moneymaker since 2003. In fact, its earned record profits in 2006 and 2007. And some insurance companies leave little doubt about how they did it.

The nation’s largest insurer, Allstate, wrote to investors last year that its strategy includes “removing wind coverage from certain policies,” “changes in rates, deductibles and coverage” … even “discontinuing coverage” for some types of homes.

Chubb insurance credited “contract wording changes related to mold coverage,” and other "loss remediation measures" for its rising profits.

“Insurers can be very proud of their performance, both in the wake of major disasters across the country, whether it’s hurricane Katrina or the California wildfires or on any given day of the week,” said Robert Hartwig, president of the Insurance Information Institute, which speaks for the industry.

CNBC: “To what extent are the profits coming at the expense of policyholders and their coverage?”
Hartwig: “There's no inconsistency between the profits insurers are generating and the level of coverage and service that customers are getting.”
CNBC: “One of the things that we’ve heard a lot about and that regulators and others tell us is becoming more prevalent, is what they call low balling, where people will file a claim.  The scope of loss comes back.  And there are things that are missing. … Is low balling a problem?”
Hartwig: “There is no such thing as low balling in the homeowners insurance industry.”
CNBC: “No such thing?”
Hartwig: “That's right.” 

And about all those exclusions: Hartwig claims that where insurance companies have cut coverage, it has been for the homeowner's benefit.

“Generally speaking, the homeowners insurance policy has remained relatively unchanged,” said Hartwig. “But if you have a homeowners insurance policy that begins to provide coverage for types of losses which were never intended, you ultimately wind up with a premium that is unaffordable to many Americans.”

That kind of coverage is also unaffordable for insurance companies to offer and still maintain those record profits. But Hartwig says these good years are necessary to pay for the bad ones. 

"It is in the consumer's best interest to have an insurance industry that's profitable, financially secure, sound and stable,” he said.

Still, Hartwig says the industry has built up $100 billion in excess capital — well beyond what it needs to cover losses. 

“The insurance industry has built up capital,” he said. “And so what insurers are doing is returning that capital to shareholders.”

In other words, rather than using that money to beef up coverage, insurers are using the vast majority of it to buy back their own stock.

CNBC: “That doesn’t sound like an industry that’s saving up for a rainy day."
Hartwig: "Well, in fact, the industry has done that. The industry has had reasonably good levels of profitability in 2006 and 2007.”

Hartwig says the vast majority of homeowners are satisfied. But nearly five years after the 2003 wildfires in California, nearly 100 complaints are still unresolved. And Karen Reimus is holding insurance seminars for victims of the most recent wildfires.

“The whole thing with these 2007 firestorm issues, it’s just a flashback,” said Reimus.

I mean it’s almost like reliving what happened in 2003. I’ve been in contact with a lot of 2007 firestorm survivors through my volunteer work. I mean, a lot. And the underinsurance is rampant. It’s the same stuff.”

And with the industry warning about pressure on profits as the economy slows, Reimus hopes that doesn’t mean more pressure on homeowners.

“Our house had just burned to the ground and anything and everything we ever had was gone,” she said. “They use advertisements that said if something bad happens, they’re going to put me back. And I paid good money for that coverage. I shouldn’t have had to fight that hard. And I shouldn’t have had to fight at all.”

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