The Kind of Car Insurer That Gives Consumers the Best Value

The New York Times

Are people better off when they buy things from companies that don’t have public shareholders they need to please?

The answer, at least in the nearly $200 billion auto insurance industry, appears to be yes.

That’s the conclusion of a new and comprehensive study examining the claims-paying histories of more than 300 auto insurers in the last five years.

The analysis was conducted by ValChoice, a data analytics company that aims to bring some transparency to the opaque insurance market.

Unlike many lines of business, auto insurance has two types of companies serving buyers.

One group consists of publicly traded companies that must satisfy both shareholders and policyholders. The other kind of operation — known as a mutual company — is owned by its policyholders and so does not have to serve two masters.

Many businesses try to benefit a wide array of stakeholders — investors as well as customers and employees. But the potential for conflicts in these operations has become a hot issue recently as companies like Valeant Pharmaceuticals International have been attacked for pricing policies that hurt consumers while enriching executives. (One of Valeant’s former executives was charged with criminal fraud on Thursday by prosecutors in New York.)

Conflicts that exist among insurance companies are less obvious to consumers, industry experts say, in part because of the complexity of the business.

The ValChoice study sheds light on this problem. It found that the car insurers providing the best value to consumers were mutual insurance companies owned by their policyholders and paying them dividends. Over a five-year period from 2011 through 2015, these companies paid out an average 72.6 percent of their premiums in claims; publicly held insurers with shareholders to satisfy paid 62.8 percent of their premiums in claims.

Dan Karr, a former technology executive who founded ValChoice, said it was hard to know exactly why such disparities exist. But a central factor, he hypothesized, is the difficulty of having to please both policyholders who want generous payments when they have an accident and shareholders who expect sizable profits.

“There’s a conflict here between shareholders and policyholders,” Mr. Karr said. “We’re showing how companies have run their businesses, and that’s not always in the interest of the policyholder.”

The ValChoice study divided the auto insurance market into three types of companies. The largest group — 48.3 percent — are publicly traded corporations like Allstate, Geico (which is part of Warren E. Buffett’s Berkshire Hathaway conglomerate) and Progressive.

Among mutual companies, there are two different business models. Some companies return earnings to their policyholders in the form of dividends, while others do not pay dividends but keep the earnings at the company.

Read more of the original article at The New York Times.

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