Infuriating Insurance Claims

Policyholders protest that companies cancel and kick up rates

In one Monty Python TV skit, an insurance agent blandly informs a client that his premiums have been low only because his policy states, way down in the fine print: "No claim made by you will be paid."

To some American viewers, that no longer seems such a wild exaggeration. They have been filling the air with complaints that auto and property insurers, though they usually pay off if pressed, often turn around and penalize claimants by canceling policies, refusing to renew them, or raising premiums so high that the policyholder in effect winds up paying for an accident himself.

A sampling of policyholder protests:

> Lester Tobin, a physician in Lynn, Mass., paid premiums on a homeowners' policy and had a spotless record for 20 years. Three years ago he switched to Royal Globe Insurance Co., and since then he has collected $2,275 on three claims--two for water damage caused by heavy rains, one for a robbery. This year Royal Globe refused to renew the policy. After Tobin's agent made a personal appeal, it renewed, but for only one year, and it raised his deductible from $100 to $250.

> A Chicagoan, who requests anonymity because he works for Allstate Insurance Co., reports: "After an 18-year accident-free driving record, I put in my first claim this winter, for $350. I was not at fault; someone skidded into me on the ice. Now my insurance company [not Allstate] is going to increase my premium by 50%."

> Glen Young, a farmer in Ravenna, Ohio, after a prolonged hassle, got Western Reserve Mutual to pay $2,100 for his pickup truck, which ran into a ditch and was totally wrecked last October. A few days later, says Young, "I was told that my coverage would be terminated in 15 days, not only on the policies on my three vehicles, but also on the farm policy I have had for eleven years with Western Reserve's sister company, Lightning Rod Mutual." Young protested to his Senator, Democrat Howard Metzenbaum, and his coverage was extended after an aide to Metzenbaum phoned the insurance companies.

In hearings earlier this year, Metzenbaum, chairman of a Senate Judiciary Subcommittee, got an earful of such gripes. Widows and divorcees howled that their auto insurance premiums had been raised sharply because of their change in status. An Arizona college student and part-time waitress reported that a company had canceled her auto coverage because "waitresses are considered transients." Metzenbaum's conclusion: "A persuasive case has been made that, in order to maximize profits, property and casualty companies [a category that includes auto insurers] are rejecting 'clean' risks in an apparent attempt to eliminate all but the ideal policyholders--that is, ones with no losses."

In rebuttal, insurance companies assert that the complainers are a small fraction of policyholders. That seems to be generally true, but the record varies from company to company. In 1976 the Illinois insurance department got 2.2 complaints per $1 million of auto policy premiums for State Farm Mutual and 43.85 for Kenilworth, a much smaller firm.

Auto insurers base premiums on actuarial tables showing the frequency of claims made by policyholders classified by such factors as age, sex, marital status, occupation and even neighborhood. People who get socked the hardest are those who are single, under 25 (particularly young men), residents of central cities and who work as laborers, waitresses or musicians or who serve in the armed forces. Since a small percentage of people account for an inordinate number of claims, actuaries figure that if a client makes a claim, the statistical chances rise that he will make another, and so his premiums rise to reflect that risk. Consequently, many agents echo the advice of fellow Broker George Peters in Newton, Mass.: "Buy insurance to cover you for that one catastrophe. Don't put in for small claims. It's the frequency that hurts."

These practices have helped the profits of property and casualty insurers, which have soared in the past few years. Aetna, a giant in the group, raised earnings per share from $1.90 in 1975 to $7.76 in 1977, and is likely to clear $8 this year. President William O. Bailey readily admits that Aetna's rates will jump ever more sharply for people who suffer accidents or losses.

In setting rates, insurers must guess at their future costs of settling claims.

They tend to estimate on the high side to make sure that they have enough in the kitty to pay off. State insurance commissioners struggle to decide just what rates are reasonable, but these bureaucrats are hampered by their lack of actuarial knowledge.

Some states have lately begun to forbid property and casualty insurance companies to drop a policyholder for three years after he suffers a loss or accident. Going further, Metzenbaum is considering federal legislation forbidding insurance companies to cancel or refuse to renew policies unless a person runs up a long record of claims for mishaps that are his own fault. That would help to still the protests and make claimants feel that, whatever their bad luck, they were at least getting a fair shake.

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