The Consumer Federation of America and the Center for Justice & Democracy at New York Law School recently released a study called How the Cash Rich Insurance Industry Fakes Crises and Invents Social Inflation which indicates that the insurance industry has created a fake crisis, blamed on social inflation, so they can price gouge their customers. This study exposes instances dating back to the 1970s where insurance companies have created a crisis that “blame lawsuits, juries, and injured victims for premium hikes even though litigation data and the industry’s own loss data show that claims were actually stable throughout each of these crises.”
Co-author Joanne Doroshow, CJ&D’s Executive Director, said, “It is appalling that, for decades, the insurance industry has gotten away with victimizing U.S. businesses by creating crises in insurance affordability and availability, while falsely blaming juries and victims for the industry’s own mismanagement. The public has had enough of this endless cycle and the periodic crises that accompany it. We hope insurance regulators finally take some steps to reign in the excesses of the insurance industry, whose business practices are wreaking havoc on both businesses and injured victims who are falsely blamed for this.
J. Robert Hunter, CFA’s Director of Insurance, said “the industry has developed a new term for their old target, blaming ‘social inflation’ in courtrooms for problems that really result from unrelated economic conditions facing the industry. In the data, we are able to see that the insurance industry is responsible for what’s happening in the market now, just as it was when prices spiked sharply about 15 years ago and 15 years before that, too.”
The study indicates that while the insurance companies are beginning to lay the groundwork for raising their rates again, they are sitting on more money than at any other point in history, “a record level of well over $800 billion.”
“For most Americans who do not pay close attention to insurance markets, it is easy to be misled by this industry when it tries to justify rate hikes after years of stable or decreasing premiums. This is exactly the situation in which some businesses find themselves today.
“Insurance companies have never been forthcoming about why ups and downs in insurance premiums happen. In these cyclical hard markets, they have internally admitted that the cause is the industry’s own self-made boom and bust economic cycle. But publicly they have attempted to cover up their mismanaged underwriting and accounting practices by blaming lawyers, juries, and the legal system. Today they are making such claims even though both litigation data and the industry’s own loss data show that claims are not spiking and ‘tort costs’ are stable.
“In previous crises, the industry pointedly blamed the legal system, but that old attack has been exposed as incorrect in each of the three previous hard market periods. So, in the current run-up to a new hard market, the insurance industry needed a new public relations term to make the case for higher rates. It has settled on a new name to describe its current interest in raising prices: ‘social inflation.’ Over the last several months, insurance industry representatives have begun a seemingly coordinated effort to market the idea that ‘social inflation’ (i.e., lawsuits by injured, harmed, and defrauded consumers and policyholders) are hurting insurers financially.”