Citizen’s Response to Wash Post Article about Sewer Insurance – Questions Need Answers
I’m a retired property and casualty insurance broker. I was not an actuary and am not a statistician but from my 30 years of professional experience I can glean the following from your article. The insurance product being offered is not on its face a bad product. It would be useful to someone unfortunate enough to suffer an expensive sewer breakage, with the caveat that it would be covered (the exclusions related to age of the sewer system are quite onerous).
The problem is the cost. Insurance companies make their money in two ways. One is underwriting profit: total premiums minus expenses (primarily marketing and agents commissions) and claims paid. The other is investment result: the profit the insurer makes on investing its claim reserves. Property and Casualty insurance companies often don’t make underwriting profits – they run underwriting losses but make their money on investments. We consumers look at insurance companies as selling insurance. Insurance companies see their business as buying money they can invest in return for promises they make.
Looking at the data provided in your article, it appears that the insurers offering this sewer insurance are making exorbitant underwriting profits on this product line. In the due diligence our city manager, their staff, and our city council allegedly performed, before endorsing this product, did they request any data related to the profit / loss ratio the insurance carrier was running on this product? Did they ask the League of Oregon Cities (which had referred this to its members) if it had done such due diligence? Did they ask anyone who knew anything about insurance what they thought about this, before putting their imprimatur on this program?
Art Baden, Ashland