Dean Starkman, who has reported for The Wall Street Journal (WSJ), The Washington Post and other publications, didn’t start out with the intention of specializing in reporting on insurance issues. He covered business issues such as white collar crime, the real estate industry and paper mills. He started doing more articles on insurance because “insurance is everywhere.”
After covering the insurance trial putting World Trade Center leaseholder Larry Silverstein against his insurers for WSJ, Starkman began a freelance career starting with a contract with the The Washington Post covering the investigation of the insurance industry by then-New York Attorney General Eliot Spitzer.
“Insurance became the story of the moment, and I found it fascinating,’ Starkman said. “I got totally absorbed in the story. Insurance is so different, unusual and mysterious. It is wildly profitable and super secret.”
After Hurricane Katrina hit, insurance again came to the fore as one of the top news stories. After his first trip to the Mississippi Gulf Coast, it became clear to Starkman that insurance was going to become a major issue. In covering the swamp of conflicting claims for The Washington Post,
Starkman was struck by how very far apart the arguments are.
“The insurance industry was claiming its performance was exemplary post-Katrina,” Starkman said. “On the other side of the equation, there were claims of not just poor performance but widescale abuse of policyholders by the tens of thousands. What I thought was so interesting is that these weren’t just two slightly different spins on the picture. This is like two different planets.”
What he found remarkable is that there was no data to prove which side was right. All the data were problematic. For example, some of the insurance companies maintain that 98% of claims have been settled.
“All that means is that 98% of cases closed whether the policyholder was satisfied or not,” Starkman said. “It was just that they aren’t suing. On the other side, policyholder people and lawyers, the Scruggs and Hoods and Taylors, all they could offer was anecdotes, one after another.”
Starkman talked to many people who felt their claims had been mishandled, and he believed them. But he doesn’t think anecdotes are enough, and feels the hard data to support either side were lacking. That is why he launched, with the help of a Katrina Media Fellowship, the Insurance Transparency Project, http://insurancetransparencyproject.com/, which is “all the riveting insurance news about insurance that you can stand.”
Starkman’s general theory behind the quest for insurance transparency is that right now, customers’ problems with the industry stem from the fact that buyers don’t have enough information to reward the good actors and punish the bad. Economists would call this an asymmetry of information.
“Specifically, as things stand now, insurance buyers can’t see two important things: price and performance,” Starkman said. “It is difficult to know and compare the price of insurance—whether for a policy for homeowners or medical malpractice coverage. More importantly, it’s impossible to know which insurance company is more likely to pay a claim. It’s also hard to know which insurance company is more likely to terminate a disability policyholder’s claim, drop a health insured, deny a homeowners’ claim, be sued by its customers or pay less on a claim than its policyholders have demanded.”
The “holy grail” of the Insurance Transparency Project would be the claims payout ratio. How much did policyholders ask for? How much did they get? What is the ratio?
“If you thought your policy was worth $100,000 and you got $10,000, you got 10¢ on a dollar,” Starkman said. “But all we see is one side of the equation, what insurers felt the claim was worth but not what policyholder feel it was worth.
Policyholders might have an incentive to inflate their claims, but that is no worse than insurance companies who have the opposite motivation to underinflate claims. My idea was that if you went beyond what insurers paid, and got the number that policy holders felt was owed, that is the beginning of a discussion.”
Starkman argues that if you could not only measure the performance of the industry overall, but compare the performance of one company versus another, there would be an opportunity for the market to begin to function more effectively. If insurance buyers had information they needed, they would become more sophisticated.
If a company has good price but low performance ratings, insurance buyers would be able to figure out if they wanted to take a chance and pay less, or pay more for a policy with a company with a better record of paying claims.
“The market would be able to reward companies that got the mix right,” Starkman said. “Charge proper premiums and pay in a way that comes closest to satisfying the demands of policyholders. Now you have a market that is operating a lot more efficiently and does what markets do best: reward the good and punish the bad.”
Having covered other industries and corporations, the idea that you wouldn’t have a basic metric of insurance performance blows Starkman away. Unlike knowing how a mutual fund has performed in recent years, you have no idea how insurance companies have performed in the past. It is like purchasing a certificate of deposit without knowing the interest rate.
“Insurance is not particularly exotic,” Starkman said. “It is not complicated. It has one moving part: ‘Do you get paid?’ If we had those kinds of numbers, the beat would be a lot easier to cover for a reporter or personal finance specialist. Secondly, insurance buyers would be a lot more sophisticated than they are now. Insurance companies say many customers don’t have enough insurance. Right, but how can a consumer make good decisions based on the information they have? It is hard to compare prices and policies, and impossible to know how they are going to perform.”
Starkman’s work may seem sympathetic to policyholders, but he says he is not an advocate for policyholders. He is also not an advocate for the industry.
“I advocate for nothing except greater disclosure,” he said. “I am an advocate for greater disclosure so this industry becomes one that in the end is better and more efficient.”
Starkman has come to question some basic tenants of today’s insurance markets in the U.S. If insurance is about spreading risk among the largest number of people possible, why are markets broken into 50 irregular shapes and sizes according to state boundaries?
“State Farm can leave Mississippi without a backward glance,” Starkman said. “Mississippi needs Allstate more than Allstate needs Mississippi. No one state, and certainly not Mississippi and Louisiana, have enough leverage to police the industry and get them to pay claims, if necessary with penalties, at the same time they are trying to coax them to stay in the state. Those two goals just don’t line up.”
Starkman said it makes it impossible for even the most populist rabble-rousing insurance commissioner to force the industry to pay its claims and at the same time keep the company from leaving the state.
“The state needs insurance just for the economy to function,” he said. “If Mississippi and Louisiana are fighting the same battle but separately, their leverage is less than if they were together.”
Why should people in North Mississippi subsidize people on the Coast? Starkman said the answer is it is insurance and that is what insurance is: A lot of people paying premiums but only a few people need them. The trouble now is there is an outsized risk on the Coast and only a small pool of premium payers to support that. If you ignore state boundaries, and risks are distributed nationwide, it just wouldn’t cost as much.
“In 2005 we had the worst insured loss in the history of insurance, $60 billion, and also had the most profitable year in the history of insurance, $45 billion,” Starkman said. “There is plenty of money to cover huge catastrophes if the risks were spread out across the country and not chopped up into irregular markets with the clump of business on the Coast. It just doesn’t make any sense.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.