Transcription
Americans paid $1 trillion into the property and casualty insurance system. They got paid $636 billion in claims. So there's about $400 billion missing. Where did that $400 billion go? A new academic article out from Brian Sheer at the Vanderbilt Policy Accelerator explains exactly where it went.
So first, what is property and casualty insurance? It's the insurance that you're either legally required or practically required to buy. So, it's auto insurance, home owners insurance, title insurance, liability insurance, etc. So, that $636 billion goes towards dealing with all that. But the other $400 billion goes towards other things.
$150 billion went to advertising and agent commissions, flow, the gecko, the State Farm, Super Bowl ads for a product that you are legally required to buy. Stock buybacks, dividends to shareholders, executive comp, and the hundreds of millions of dollars.
And there's another piece to the insurance puzzle, the reinsurance part of it. Insurers have to buy insurance. These reinsurers take on the catastrophic risk so the insurer doesn't explode when a hurricane hits. But in the last 5 years, reinsurance premiums also doubled, which the reinsurers called quote a climate epiphany. But at the same time that their prices doubled, their return on equity hit 20%, which is the highest ever.
So essentially what's happening here is that things are getting more and more expensive. But it's not paying for any risk. It's not helping the consumer anymore. It's just making the insurance companies even more money.
Compared to the IRS, they administer the entire federal tax system on a budget of about $18 billion. The PNC and insurance industry burns through over $500 billion in overhead and profits to administer what is essentially a privatized tax, one that's a fifth the size of federal tax revenue. They're extracting much, much more to deliver much, much less. And we have the receipts.
So there's these loss ratios. The share of every premium dollar that actually gets paid out in claims used to run above 80% through the 80s and 90s, but they're in the low 70s now. This has been a problem for over a hundred years. The Supreme Court in 1914 backed up rate setting laws nationwide and called insurance a tax the public pays to share in risk. That framework held for most of a century. Then came deregulation and loss ratios dropped and profits rose. Insurers learned they could just threaten to exit a state and regulators would fall. We saw this in California. State Farm just ran the play.
And Shear's proposal to fix this is to set an 80% loss ratio floor. The same rule that the ACA applies to health insurance. 80 cents of every premium dollar has to go to claims or the insurer rebates the difference back to the consumer. This could save Americans $150 billion a year. We again know how to fix this. We just have to do it. And you can check out Brian's paper for