Good Faith v Bad Faith Insurance Practices: Behind the numbers

A short post to illustrate why Sam Friedman’s thesis that more PR spending is needed to turn public perceptions around about P&C insurers is all wet. Not that I’m picking on Sam because the discussion he started is a good one even if I think he has it wrong on why the public holds insurers in such low regard.

First off since I’m a CPA and an investor I know a thing or two about both the Edgar database at the US Securities and Exchange CommissionUS GAAP and financial statements so I’m going to take some shortcuts to bottom line this for everyone. (This is Saturday after all).

Earlier today, we covered the FBIC list of bad faith insurers, which our anecdotal collective experiences as Katrina slabbees well bears out on the property and casualty side. How does the loss ratio of a bad faith insurer such as Allstate compare to the number 1 good faith insurer Chubb? The answer is that cutting corners doesn’t equate profit margin. To wit:

Chubb’s P&C Loss Ratio: (Source: 2008 Form 10K on file at the US SEC)
2008 – 58.54%
2007 – 53.05%
2006 – 54.90%

Allstate’s P&C Loss Ratio: (Source: 2008 Form 10K on file at the US SEC)
2008 – 74.40%
2007 – 64.87%
2006 – 58.52%

I know there are importance differences between Chubb and Allstate despite their both being primarily property and casualty insurers. Size matters in financial services sector and larger is not necessarily better from a profit margin standpoint.

Chubb is more of a boutique underwriter of insurance but they also have very strict underwriting standards which I am personally familar as a former corporate customer. Yeah former, after Enron et al Chubb wanted no part of professional liability insurance for small CPA firms like mine.

That said I would submit the claims practices of these industry peers mirror the business model of the insurer. Allstate casts a wide net for market share without fully appreciating the risks IMHO. As I implied in my only contribution to Nowdy’s The Scheme series on the meaning of what was dubbed the Slabberator, failure to effectively control front end risk mean unsavory things have to be done on the back end to meet market expectations and (stay solvent enough to pay those big bonuses to people like former and current Allstate CEOs Ed Liddy and Tom Wilson and their cronies).

So while Allstate turned to flawed methdologies in ERM dashboards to manage their insurance business, the underwriters at Chubb still get their hands dirty the old fashioned way. ERM has a place in managing such a business but it can never replace critical human thinking.

I wonder how the loss ratios of the P&C insurers stack up across the sector. Without knowing my guess is the good faith variety of insurers will outperform the bad faith variety on that measure. I may have more on this later – if this has been done or if a financially oriented reader wants to give it a shot we’d love to either run a guest post or post a link.


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