Insurance companies are running ads about how they are giving money back to their customers during the COVID 19 crisis. They are looking out for you because “we are all in this together” or some other platitude. But a closer look shows us that this Coronavirus crisis has provided a windfall for insurance companies. In fact, they made too much money and now they are giving it back. Refunds and discounts are not based on fairness. It is because the insurance companies want to increase rates in the future. If they make too much money, their requests for future rate increases will be denied. In the long run, the insurance companies will make more profit by consistent rate increases.
In Florida, insurance companies must ask the Florida Insurance Commissioner for permission to raise rates. It is not a simple ask. Each insurance company seeking a rate increase must justify the request. Each application needs to be backed up with statistical data to not only justify the increase of rates, but they must also demonstrate that their past requests were necessary and reasonable. In simple terms, if an insurance company requested a rate increase in the past and their profit margin rose significantly more than they predicted, then the Insurance Commissioner is likely to consider future requests with considerable doubt and skepticism.
The Insurance Commissioner will consider unforeseen events such as natural disasters like hurricanes in weighing any type of rate increase request. But COVID 19 presented an unprecedented situation. While a disaster, it did not cost most insurance companies anything with the possible exception of insurance companies offering business interruption coverage. For the most part, COVID 19 meant customers paid for liability insurance while locked up in their homes. Specifically, auto insurance companies enjoyed a windfall of profit unlike anything previously experienced.
Imagine you own a company that the state requires people to buy your product. You only need to compete with other producers but all of you are guaranteed a market. It is up to you to get your market share. That is the same as car insurance. Florida has minimum insurance requirements for all vehicles. Insurance must be purchased by law. The state also regulates the number of insurance companies allowed in the market.
Insurance companies justify their rates in a number of ways. The number of claims, uninsured drivers, claim frequency are only some of the factors. Fraud is also regularly cited. Costs of claims and the cost of doing business also play a role. Insurance company premiums are based on the risk being insured. That is why males from ages 16 to 25 are assessed the highest rates – they are most likely to have car accidents and thus, the highest risks.
But COVID 19 removed nearly all the risk. Due to various shutdown orders, businesses and schools were closed and people were shut in their homes. Fewer cars on the road reduce accident frequency which resulted in plummeting claims. But while the risk was nearly eliminated the premiums remained the same. Auto premiums were not adjusted when the risk was substantially reduced or nearly eliminated. As a result, insurance company profits increased substantially and at some point, they made too much money.
What happens when a Florida insurance company makes too much money? It probably loses the ability to raise rates – at least for a while. It may also make obtaining future rate increases more difficult. So, what did these car insurance companies do? They bought tons of ads and commercials and told everyone how they are “giving back” because “we are all in this together” or some such thing. They reduced their profit margins to an “acceptable” level so that future rate increases could be obtained. At the same time, they enjoyed the publicity of giving money back or providing discounts to their customers.
You might think insurance companies hated returning money to their insureds. But it is important to understand the nature of insurance companies. They prefer steady and predictable growth. Wild swings in profit or loss are avoided. Much of what insurance companies do is trying to predict the future of risk and profit. The decision to provide refunds and future discounts wasn’t that hard when you consider the big picture. When you add in all the feel-good publicity for insurance companies it was positively a no-brainer. Keep that in mind when your car insurance rates rise in the next year.
Wolfson Law Firm has fought against insurance companies since 1963. We have offices in Miami, Fort Lauderdale, Fort Myers, and West Palm Beach. If you are having problems with your insurance claim then call us for your free consultation. If you are an attorney and want to consult with us about an insurance issue then please call. We are always available to work with other attorneys in accordance with Florida law. Call us today at (305) 285-1115 – we can help.