Friday, June 23, 2006

Insurance companies' right to deny you a policy

As I said last night, the fundamental nature of private property rights must include the right of companies to hire only those they want, for any reason or no reason at all, even if it's "discrimination." Another right is of companies to do business with only those they want, also for any reason or no reason at all, even if it's "discrimination." Many people challenge this, saying companies should treat everyone equally. But how can there be any argument, any complaint, when a company ceases to do business with you because you're less profitable?

When I came across this article earlier today, I couldn't believe that the quoted homeowners don't understand how insurance and risk work, or their attitudes implying they have a right to it. Marie Collins may feel it's "outrageous" that Allstate cancelled her hurricane policy, but Allstate's actuaries have reckoned that Long Island (Brooklyn and Queens are on its western end, but "Long Island" rarely is used to include them) is now a much higher risk. Whether that is true or not is irrelevant: all that matters is the insurance company's judgment. People might complain they're "paying more for less," but insurers think they've become a greater liability. Therefore, balking at higher premiums is expecting the insurance company to bear a higher risk of losing money on them.

The risk is now calculated so significantly higher that Allstate likely decided that requisitely higher premiums would drive away too many customers for the area to remain profitable. So Allstate chose to lose the revenue from those policyholders, rather than risk payouts that could well exceed collected premiums. Though a "devastating" hurricane may not have hit Brooklyn since the "Long Island Express" of 1938, it wouldn't take that or a Katrina. Insurers could lose a lot of money if a strong hurricane hit at high tide, causing severe flooding from coastal New Jersey to Montauk. Yes, they would turn to their own reinsurers, which is actually common practice, but then insurance companies' own reinsurance premiums would surge, and they couldn't afford to pay out for the next castastrophe.

The article mentions insurers' "record $43 billion profit in 2005 -- an 11.7 percent increase from the previous year and the highest net income since 1991." Did the writer really intend to admit that it took insurance companies 14 years to return to a previous level of profit? This is another of mainstream media's insinuations (a slur, really) that big companies are greedy and exploitative of their customers. If you look at Allstate's 2004 report (2005 isn't available yet), you'll see its net income in 2004 was $3.181 billion, but out of total revenues of $33.936 billion. That 9.4% is not particularly impressive compared to other industries (be sure to check that link to a page on our friend Josh Hendrickson's blog), and in fact, it's better than the previous few years. In all fairness, if you criticize insurance companies' profits, then you must also weep for years like 2001 and 2002, where Allstate's net income was only 4% and 3.8% of revenues. Similarly, no one wept for oil companies in the late 1990s, when their profits practically withered as oil prices approached $10.

A lot of people don't realize that Allstate, like any other insurer, is hardly pocketing the difference between premiums and payouts. Allstate necessarily holds tens of billions in reserves ($86 billion as of 2004) for major future payouts, like life insurance. Additionally, any insurer invests a great deal of these in a wide variety of assets, so a good chunk of people's premiums actually become fuel for the economy. This is one reason the U.S. national savings rate is higher than is commonly calculated. Insurance premium payments are treated as consumption spending, though part is turned into investments. If you pay $200 a month in policies, and $20 is invested in stocks or government bonds, you yourself aren't saving $20 more a month, but that does count toward national (total) savings.

Most fundamentally, it is Allstate's right not to renew policies, whether or not someone's genuinely an increased risk, and no matter how long Collins has been a customer. You do not have a right to others' property beyond their consent. Once the contract is up for renewal, it is not enough that one side alone wants to continue the relationship. It's utter rubbish that there should be government agencies to which people can complain. The proper way for them to complain is through not doing business with that insurer.

Ah, but other insurers would also charge them higher premiums, or refuse to give them a policy? Then perhaps the homeowners need to understand that they're higher-risk customers, and that there's a reason for what the insurers are doing. After all, Allstate, Nationwide, MetLife, et al, are not stupid. They're not going to turn down free money, no more than they'll continue insuring people that they believe aren't profitable (or at least sufficiently profitable).

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