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Wait a minute, are reasons for insurance rate increases bogus?

It's no secret that business and home insurance rates are surging. Allstate, the nation's second largest home insurer, raised prices an average of 5.6 percent in the first nine months of last year. Travelers, another major insurer, boosted prices for business customers by 8 percent in recent months. (Both figures come from statements by company executives.)

The price increases reflect what insurers describe as a "hard market": limited capacity and higher prices. But are these price hikes legitimate, or are they "price gouging" by the industry?

A recent study by Americans for Insurance Reform (AIR), "Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America," claims that insurers collude to create hard markets so they can get "astronomical" rate increases.

The worst of times

The study's authors -- J. Robert Hunter, director of insurance for the Consumer Federation of America, and Joanne Doroshow, co-founder of AIR and executive director of the Center for Justice & Democracy at New York Law School -- contend that property and casualty insurers have huge cash surpluses they can use to pay claims and don't really need to raise rates. "The creation of a hard market now would be purely for the purpose of price-gouging buyers of insurance," the study asserts.

insurance rate increasesA hard market usually occurs after a major disaster. During 2011, there were plenty of them, with two of the largest-recorded U.S. tornadoes and Hurricane Irene. Worldwide catastrophe losses, which included a tsunami in Japan and earthquakes in New Zealand, were $105 billion, making it the costliest year ever, according to the world's largest reinsurer, Munich Re. Reinsurers provide backup insurance for other carriers.

But Hunter and Doroshow contend the insurance industry's unclear accounting practices and its favored position with insurance regulators allow it to create its own crises. They hold that insurers actually have huge surpluses and can handle any crisis without requiring big rate hikes for consumers.

Insurance industry reacts

The insurance industry has been quick to react to the study. Robert Hartwig, president of the Insurance Information Institute (III), called AIR's claims "dangerous and factually incorrect." He holds that the fact that insurers had a surplus of more than a half-trillion dollars was a good thing for policyholders. Because of such cash, "not a single traditional property-casualty insurer failed as a result of the [2008] financial crisis and not a single claim went unpaid," said Hartwig in a prepared statement.

One topic of debate is whether the insurance industry is capable of manipulating the market.

A rise in rates is largely beyond the control of U.S. insurers, says Steve McElhiney, who is president of the Chartered Property Casualty Underwriters Society and works with international reinsurance companies, which provide backup for U.S. insurers.

"Pricing is a function of worldwide reinsurance capacity," he says, so international prices control the market, not U.S. insurers.

Call to action

Hunter and Doroshow maintain that insurance companies are able to act in tandem to set prices because they are exempt from the anti-competitive restrictions imposed on other industries because of the federal McCarran-Ferguson Act.

The law exempts the insurance industry from most federal regulation, including, to a limited extent, federal anti-trust laws.

The AIR report says Congress should repeal this exemption. Or, at the very least, the Federal Insurance Office (FIO) should look at the harm done to consumers by allowing an environment where insurers can work together to set prices.

But the new FIO director, Michael McRaith, in a speech to insurers at a conference in January, said that federal regulation would not be one of his priorities.

"Let's be clear," McRaith said. "The FIO is not a regulator. That remains the province of the states."

States rule

David Snyder, vice president and associate general counsel of the American Insurance Association, says the anti-trust exemption was given to insurers for good reason: They are governed by state laws rather than federal laws.

"We are totally subject to state regulation," says Snyder. "In no other industry does state government approve prices the way it does in insurance."

But Hunter and Doroshow see it differently. They hold that states seldom force insurers to provide data needed by regulators to figure out whether insurers are making huge profits or barely breaking even, as insurers often claim.

The study calls on state regulators to take a more active role and "carefully review any requests for price increases in this emerging hard market."

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