As a result of the liability insurance crisis and auto insurance affordability problems, the profitability of the property-liability insurance industry has been intensely debated during the past several years. Measurement of insurer profitability is problematic for several reasons including the failure of insurance company financial statements to report estimated unrealized capital gains on bond portfolios and to discount loss reserves. Moreover, results for any given year may be greatly affected by errors in reported loss reserves. By line and by state calculations are even more problematic. It is difficult to allocate accurately many expenses and investment income either by line, by state, or both. Similarly, there is no solid theoretical basis for allocating insurer surplus (equity) in order to calculate rates of return on surplus for different lines and states.

Table 6

Market Concentration for Private Passenger Auto Insurance in 1988


Concentration Ratios







Herfindahl - Hirschman Index

Number of Insurer Groups







  State Average












Source: Robert Klein, "Competition in Private Passenger Automobile Insurance: A Report to NAIC Personal Lines (C) Committee", September 1989

Based on generally accepted accounting principles, the average annual rate of return on surplus for the property-liability industry during 1972-87 was 10.4 percent. [88] The rate of return on surplus for auto insurance in 1988 has been estimated at about 8 to 9 percent. [89] In recent years the loss ratio (ratio of incurred losses to earned premiums) for auto insurance in Michigan has been significantly higher in Michigan than the average for other states. [90] Whether this result suggests that auto insurance profitability has been below average in Michigan is not clear given that other factors that affect profitability (such as investment income earned between the receipt of premiums and the payment of claims) could differ between Michigan and other states. [91]

Critics of the industry have argued that reported operating results understate insurer profitability for a variety of reasons including the failure to discount loss reserves and the possibility that insurers deliberately inflate estimates of losses to hide profits. However, there is no evidence that insurers consistently overstate their loss reserves, or that discounting losses on financial statements would substantially increase the return on surplus (since discounting loss reserves would increase both reported income and surplus). [92] Consumer advocates also have sometimes compared written premiums and paid losses to imply excessive profits. [93] This comparison is patently misleading because (among other problems) it does not consider an insurer's obligation to pay claims in the future. Written premiums in a competitive market will grow much faster than paid claims when expected claim costs are growing rapidly.