Behind the Negative Image: The True Role of Insurance Companies
The insurance industry faces an image challenge. Plaintiff attorney highway billboards and websites routinely disparage insurance companies as fat, greedy and collusive. One plaintiff law firm website declares that “at the end of the day, the liars, cheats and the frauds are the insurance companies, their fake doctors, and lawyers who sold their souls to the devil by being hired to confuse, mislead and deceive the jury.” Consumer advocate groups such as the Consumer Federation of America declare “insurance company greed is the real inflationary pressure facing policyholders.” A former insurance commissioner once even insulted the industry’s workforce, suggesting that insurance companies can only attract bottom of the barrel job candidates, who he called “dregs.”
Two years ago I taught a university risk management and insurance class for finance majors, comprised mainly of seniors. At the class’ first meeting I asked the 31 students how they view the insurance industry. Several students’ hands went up. All had only negative things to say about insurers. Not one student proffered a positive comment. I asked if they could envision themselves working in the insurance world in their future career. No hands went up. This should not be a big surprise considering the industry’s image is shaped in large part by false narratives perpetuated by the plaintiff bar and overzealous consumer activists, narratives picked up by a media that lacks an understanding of the industry and is happy to pile on to unjustified critiques. As is said in journalism, “what bleeds, leads.”
Fatcats, Really?
Notwithstanding negative characterizations of insurers by plaintiff attorney firms and by consumer activists, facts show that insurance companies are not fat and greedy. The average insurance company employee’s annual salary is $76,656. This is lower than the average salary at other financial services companies. Commercial bankers’ average base salary is $100,388. Base salaries for analysts and associates in other financial services, such as asset management, investment banking and private equity are on the order of $100,000 to $150,000. Total compensation is higher because year-end bonuses render total compensation considerably higher than base salary. With average salaries below six figures, insurance workers are not earning fortunes. And at the top end, only one among the 20 most highly compensated CEOs of S&P 500 firms runs an insurance company. At a congressional hearing where I testified in September 2023, Sen. Thom Tillis (R-N.C.) asked me if insurance companies are “making money hand over fist and greedy, based on the data?” I replied, “The data says they’re not. In 2022, there was a four percent margin—profit margin—because investment income kicked in about 600 basis points, and long-term, the insurance industry has got a return of 6.5 percent. Companies that are publicly traded have about 14 to 15 percent. So the insurance industry has a margin that is much smaller than other industries.”
Contrary to plaintiff attorneys’ false depiction of insurers’ job as to confuse, mislead and deceive, the real job of insurers is to sell a contractual promise to pay policyholders should there be an occurrence of some type of financial loss. In 2023, the U.S. insurance industry wrote $777 billion in net premium (after reinsurance). It paid $571 billion in losses and loss adjustment expenses. It had over $200 billion of other expenses – agent commissions, salaries and overhead, with the result that it lost $23 billion in underwriting. Investment income kicked in $71 billion, resulting in an operating gain of $43 billion. $43 billion is 4.9 percent of its direct written premium, and is far from an extravagant margin.
Paying over half a trillion dollars in claims is just one of the three main activities insurance companies perform. The second is managing their investment portfolios. Insurers have large investment portfolios which offset underwriting losses, as they did in 2023, and provide a reserve for future claim payments. The property and casualty has $2.3 trillion in investments. Most ($1.3 trillion) is in investment grade corporates, United States, state, and municipal bonds. The remainder is in stocks ($584 billion), real estate, and loans. This large investment portfolio plays an important role in the economy, supporting corporate issuers, supporting capital markets and financing the nation’s infrastructure.
Insurance, a Lubricant
The third vital function performed by insurance companies is to lubricate economic activity. In the absence of insurance protection, airlines would not bear the risk of their planes flying, ships would not sail, people would drive less, builders would not break ground in construction projects, doctors would not perform high-risk procedures for fear of being sued, pharmaceutical and technology companies would not take the risk of developing new drugs, vaccines or products. Insurance is like a shock absorber – it takes on all manner of risks from policyholders’ shoulders. It provides comfort to homeowners who know they can be made whole after a property loss, and makes workers in high-risk jobs secure in the knowledge that they will be compensated for medical expenses and lost wages following an accident.
Insurers do sometimes fail to fully meet their contractual obligations. In such cases there are channels for redress. Insurance departments in every state focus on consumer protection and insurer solvency. Complaints of unfair activity may be reported through their complaint channel. If the allegation is severe, they may hire attorneys to pursue bad faith litigation.
Just as sunlight is the best disinfectant, the reputation of the insurance industry could get a makeover if it were better understood. In the class I taught on risk management and insurance, at the end of the semester I asked the class if they might choose to work in the insurance business. Six hands went up. That was progress. It took an entire semester, but it was gratifying that teaching the truth about insurance contributed to so many conversions. The students reported that one of the things they liked most about the class was visits of guest speakers from the industry who spoke about their fulfilling careers. So if you would like to contribute to countering false narratives, my recommendation is to reach out to your local university or community college and volunteer to speak at an insurance class. Young minds are more easily turned.