This is the fifth in a series of insurance myths, published by the consumer group Texas Watch.
If you don’t like the weather in Texas, wait five minutes. But one thing that doesn’t change is the insurance industry’s insistence on a handout after every storm. When they should be honoring their contracts, paying out on claims, and helping their customers get back on their feet, here they come, like clockwork, demanding that their customers pay more and daring a weak insurance commissioner to do something about it. Their excuse? Storms cost us money so we, of course, need more money! But their slick spin is nothing more than a fallacy that plays on fears and misrepresents the very fundamentals of insurance.
One of the things that makes insurance different than other products is the way we pay for it. When you purchase insurance, you give the carrier your hard-earned money upfront, but you don’t receive anything immediately in return. Instead, you get a promise to pay at some point in the future if you suffer a loss. Insurance carriers, as sophisticated parties who employ mathematicians known as actuaries, make predictions about the future that are supposed to be based on data from decades of past weather-related experience. And, in Texas, that experience is long and well-documented. Our history of severe weather has undoubtedly already been included in the actuaries’ predictions and priced into the premiums we pay.
Put another way, since insurance ratemaking is prospective, policyholders have already paid for this year’s storm through their premiums. To make them pay again, next year, through yet another rate hike, is double dipping on the part of the insurance carrier. It’s nothing more than a forced bail out, enabling carriers to privatize profits while socializing their risk, shifting it back onto hardworking families and extracting even more dollars from their pockets. It’s enough to make Wall Street proud.
The other weather myth created by the insurance industry is that Texas is unique in our level of severe weather. To be sure, our state is prone to all kinds of weather-related events; however, we are not alone. Consider the evidence: from 2005-2009, we, along with ND and SD had eight disaster declarations, while a host of other states had many more, including OK (17), MO (16), KS (15), NE (12), NY, AL, and AR (10). Of the top ten costliest hurricanes in U.S. history, only two touched Texas: Rita and Ike. As for wildfires, Texas doesn’t even rank in the top ten of the costliest wildfires in U.S. history.
Yet, insurance lobbyists continue to act as if weather has become a new or more severe problem in our state. That argument holds no water. The bottom line is that insurance ratemaking is forward-looking – not retrospective. So, insurers should not be allowed to get away with the false notion that a single hurricane or wildfire or hail storm is justification for higher rates and even more coverage reductions.
The insurance commissioner’s job is to oversee this process, investigate, and ensure the numbers aren’t fudged. Regulators must be vigilant about forcing carriers to justify their actions by demanding that risk assessments are based on long-term loss experience – not short term opportunism.