Insurance Industry Reputation and Credibility

In a span of two days, I received three articles casting considerable doubt on insurance companies’ reputation and credibility.

The first was a Newsweek article (2-25-25) citing a study done, but never made public, for the Florida Department of Insurance. The study showed how insurance companies were moving money from their Florida subsidiaries to parent companies rather than leaving money in these subsidiaries, adding to surplus and theoretically their stability.

I did not review the study, so I do not know if this is true. Some thoughts are that insurance companies have Florida-specific subsidiaries because Florida, for insurance, is an awful state. Combine hurricanes, flooding, tornadoes, a powerful trial attorney bar, and should anyone expect a better environment than awful? Awful is as good as it probably gets. We cannot eliminate Acts of God (i.e., weather), which leaves the solution as eliminating excessively permissive tort law. And Florida has started moving that direction with what appears to be constructive results so far.

The subsidiaries are likely designed to enable a carrier to walk away from huge claims to protect the rest of the company and its policyholders in more favorable regions of the country. At least from a reasonable business perspective, this is the case. A balance is required in the good years because in the good years, carriers should print profits in a hurricane state. But those profits need to be put back into surplus for the awful year where they incur a 200% combined ratio.

Instead, however, a permissive environment has allowed some carriers not to leave the money in surplus, and most of what I’ve seen has nothing to do with subsidiaries. Instead, it has to do with the private equity model for paying founders. That is a problem.

The second article was in a newsletter, NARRATIVE, which outlined a report by the American Consumer Institute, ”The Troubling Case of the NAIC and Questions Concerning Transparency and Accountability.” Obviously, this is a consumer-friendly group, but when the main national governing and financial reporting organization is questioned to this extent, the industry would be wise to think through their image. I’ve found the NAIC can be slow, cumbersome, and frustrating with which to work, but I have always found them to be ethical. The insurance companies should do everything possible not to create openings for more attacks. Maybe the recommendations listed in this report have value. Some of the four main recommendations I read, assuming these points are valid and I have no way of knowing if the recommendations are valid, are reasonable.

When an industry is as distrusted as insurance, insurance companies should do everything possible to reasonably set and achieve high levels of ethical behavior and a willingness to abide by those standards. The trial attorneys would not have so much leverage, and nuclear verdicts would not be the problem they are, if judges and juries thought highly of insurance.

Keep in mind the saying when pointing fingers: Look at where the other three fingers are pointing! When the industry blames nuclear verdicts on the public and attorneys, it is not as if the industry does not possess considerable responsibility.

The third article was in the Insurance Journal, and it was a little different. AXA’s CEO stated that to keep property insurance viable, more emphasis must be placed on loss mitigation. He made some obvious points, like how concrete buildings do not burn the same as wood-frame buildings. I cannot agree more that risk mitigation is absolutely part of the solution.

However, many insurance companies are completely incompetent on this point. Concrete buildings do not burn easily or suffer much damage from convective storms, including hail. But I’ve seen underwriters reject and nonrenew concrete buildings because of their hail exposure. A six-sided concrete building, excluding the windows if you want, has about as much exposure to hail as to fire.

How does an industry become even less trustworthy? By making foolish decisions and taking asinine positions. The solution is not complicated. The solution does not require AI. First, admit you have a problem.

Next, risk mitigation requires another step. Insurance companies must provide proper credits for risk mitigation. It is 100% unethical to charge the same material rate on a home that has taken steps to mitigate risk and one that has not. Whether this is a hail-resistant roof, a fire-resistant roof or siding, clearing brush, better rafters, and so forth, those buildings deserve good credit.

I saw a hail-resistant roof get a 1% credit in a state with huge hail exposures, where the normal hail deductible is 10%. A 1% credit on the #1 peril makes no sense. Additionally, the 10% deductible is already so high that no amount of coverage actually exists. In this case, offer a lower deductible with a reasonable credit. But do not be so disingenuous as to emphasize risk mitigation without addressing price. All that does is spend credibility and make it easier for attorneys to bring ever more and ever larger suits.

This industry does itself no favors in creating a favorable image. The most favorable images are likely of cartoon characters. Rarely does the industry ever offer decent publicity articles, much less quality advertising of life restoration after claims.

Granted, explaining insurance financials is difficult, and lots of eyes glaze over. Still, a narrative is important so that we can show how money is not being unethically siphoned, and if it is, the NAIC should address it. If the NAIC is inadequately transparent, then address the reasonable recommendations and say “Thank you” for the suggestions. If insurance companies are truly recommending loss mitigation, then make the credits obvious. Consumers get it when asked to make their property better. However, when they’re asked to make their property safer, on their dime, while simultaneously improving the profit projections for the carrier, the carrier just increases the idea that it is just another greedy insurance company that deserves to be sued for every penny. And they may have a point.

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