Management got low rates "out of mid-air" in an effort to hold their share of a "soft" insurance market, said E. James Stergiou, president of E. James Stergiou Risk Consultants Inc., actuaries and insurance advisors to a number of insurance companies and state insurance departments.
"To keep their market share, they bent over backwards and bought the business," he said. "Now they're making up for past sins."
Insurance companies were charging 35 cents in premium cost during a competitive period in the market when they should have charged $1.40, said Stergiou.
The decisions on premium costs, he told the Select Committee on Insurance Rates and Tort Claims, were based on:
- Data that proved to be inadequate for the period between 1980 and 1985. That information did not consider inflation and an increased growth patterns of losses caused by more frequent damage suits.
Most insurance companies were generally under-reserved, Stergiou said.
- Too much credit was given for investment income at the high interest rates in effect in the early 1980s. …