We’ve noticed a disturbing pattern in our office lately from certain insurance companies. Many have been offering less and less on pre-litigation claims and are holding onto money longer and longer. The net result is that these companies are forcing more and more people into litigation.
We wondered if this was a pattern, or if we had just run into an unexpected bump with certain insurance companies, so we did a little digging. Although Geico is not the only insurance company in question, it is the one we started researching. Here is what we found.
The astonishing numbers.
Insurance insider magazine, Property Casualty 360 recently revealed that Geico reported a “profit of $680 million in 2012. The profit would have been $410 million more if not for a change in accounting rules at the start of 2012”
That’s $680,000,000 (or $1,090,000,000, depending on the accounting rules) of profit after Superstorm Sandy – a massive storm which battered the east coast and destroyed or damaged over 46,000 Geico-insured vehicles, costing the company three times what Hurricane Katrina cost it. Property Casualty 360 further reports “Geico took losses of $490 million Sandy during 2012’s fourth quarter and booked catastrophe losses of $638 million for the year”
That means that even with a $490 million dollar hit to their bottom line, the insurance giant still managed to pocket that $680 million for its owners. But where is this profit coming from?
Certainly insurance companies have been tightening up their underwriting guidelines as well as raising premiums (up 9% last year for Geico), but it doesn’t seem likely that a 9% rate increase and stricter rules can explain the doubling of profits over the past year, especially in the face of a catastrophe like Superstorm Sandy and changing accounting standards.
A culture of denial?
While there are no hard numbers publicly available, we have seen an increasing flow of Geico claims being denied or being negotiated by Geico at ridiculously low numbers. It is not unusual for an insurance company to try and pay less on insurance claims, or to deny them outright. After all, their interest is in lining the pockets of shareholders. But on the other hand, the whole purpose of the insurance company to fairly pay reasonable claims against their insured.
Much of what Geico seems to be doing is likely related to the “float.” Warren Buffett, whose company owns Geico, has often publicly said that he doesn’t care as much about the profitability of his insurance companies. Rather, he is more concerned about the cash flow they provide. As the Insurance Journal reported in 2005, Buffett has said:
The source of our insurance funds is “float,” which is money that doesn’t belong to us but that we temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events that occur today do not always result in our immediately paying claims, because it sometimes takes many years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20 million of float that came with our 1967 purchase (National Indemnity- NICO) has now increased – both by way of internal growth and acquisitions – to $46.1 billion.
Float is wonderful – if it doesn’t come at a high price. Its cost is determined by underwriting results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have received. When an underwriting profit is achieved – as has been the case at Berkshire in about half of the 38 years we have been in the insurance business – float is better than free. In such years, we are actually paid for holding other people’s money. For most insurers, however, life has been far more difficult: In aggregate, the property-casualty industry almost invariably operates at an underwriting loss. When that loss is large, float becomes expensive, sometimes devastatingly so.
The Berkshire Hathaway (Geico’s mother company) insurance portfolio “float” increased 1,600% in the 1990s and another 300% in the 2000’s, CNN reported last year. But problems with natural disasters stalled the growth of the “float” over the last two years.
Buffet’s “float” funds now? According to Property Casualty 360, it’s in the 73 billion dollar range – an amount which Warren Buffet called “This is truly having your cake and eating it too,” referring to the idea that these billions are free for his company to invest. While we are not financial analysts, it seems to us that Geico is aggressively attempting to reestablish the growth of its “float” by unfairly denying claims and by refusing to settle claims at reasonable amounts.
We understand that Geico, and other insurance companies, have duties to shareholders. But at the same time, they have duties to their insured to pay reasonable amounts for reasonable claims. But so long as Geico does not settle for reasonable amounts, we will continue to pursue their insureds in the courts.
What does an attorney do for me?
By hiring an attorney, you gain the power to push back against the claims department. It’s no longer the insurance company trying to make you doubt your experience, or trying to lowball you. It’s their turn to be on the defensive while your attorney forces them to prove that they’re keeping their promises.