A Pie Divided Looses Money

Insurer testimony before Senate Select Committee on Property Insurance Accountability in Tallahassee, Florida on Monday revealed an industry crying poor while laughing all the way to the bank. It revealed the inherent vulnerability with the legislature’s ability to regulate an industry that is allowed to divide itself into smaller and smaller pieces. Allstate is the case in point. Allstate is earning more money than ever before, but Allstate Floridian, according to its Chief Executive Officer, Joseph Richardson, Jr. is on the brink of insolvency. (This from an article in Insurance Journal)

Over the years insurance companies have gotten increasingly smaller while the parent operations have gotten increasingly larger. This paradox allows the industry to claim losses as a basis for rate increases without exposing the parent company to scrutiny or litigation. This business model effectively divides the pie and places the risk upon the residents of the state to “bail out” the smaller company in times of disaster when those residents are most in need of protection. What happens to the parent company: they get to declare themselves the victims of the same catastrophe while not being exposed to excess loss.

The solution is simple. Pierce the veil of the subsidiary and look at the entire company rather than being content with a small slice. Doing this with Allstate would reveal a company that is far healthier that testimony would lead you to believe.