WASHINGTON--Insurers that provide Defense Base Act workers compensation coverage for U.S. Department of Defense contractors in Iraq and Afghanistan were accused last week of reaping excessive profits from the government-mandated program.

A report prepared for Democrats on the House Committee on Oversight and Government Reform said the Defense Base Act coverage has been "extremely profitable" for insurers and contractors. Members of the committee, which is looking into potential misuse and fraud involving the program, also criticized the Defense Department for DBA program costs that are higher than other governmental agencies.

The Defense Base Act, which was passed in 1941, mandates workers comp cover for workers on military bases outside the United States. Later the act was expanded to require contractors and subcontractors working for other U.S. government entities to buy the coverage.

The Department of Labor administers the program and authorizes insurers to provide the coverage.

The four largest insurers providing DBA coverage over the past five years have earned a 40% underwriting profit that totals $600 million, said the committee's chairman, Rep. Henry R. Waxman, D. Calif.

In contrast, workers comp insurers in the United States typically pay out as much in claims and expenses as they collect in premiums, while earning their money from investing the premiums, the California Democrat said.

According to the New York-based Insurance Information Institute, U.S. workers comp insurers' accident year combined ratios have ranged from 140% in 1996 to 87% in 2006.

"What we are really talking about here, folks, is war profiteering--private companies making money, profits off of people who are injured or killed in a war zone," said Rep. Jim Cooper, D-Tenn.

Rep. Waxman released a draft of a bill that would require the Pentagon to purchase workers comp coverage from a single pool insurer similar to other governmental agencies.

The largest Defense Department contract in Iraq, held by Houston-based energy, construction and services company KBR Inc., illustrates the problem, according to the Democratic report. KBR paid New York-based American International Group Inc. $284 million in premiums during the five-year period. Under terms of the "cost-plus contract," KBR is allowed an $8 million markup above AIG's premium.

Out of that $292 million paid by the government, $73 million was spent to provide benefits to injured contractors in the war-torn countries, the report states. In all, AIG had almost $100 million in profits, the report states.

In a written response, a spokesman last week said AIG had not reviewed documents Rep. Waxman relied on concerning AIG's DBA profitability.

"However, AIG is confident that we price our DBA coverage as accurately and fairly as possible, given the inherent high risks of this insurance line in these regions, the uncertainties concerning the frequency and severity of future claims, and the obligation to pay claims for many years after the losses occur, including lifetime death and disability benefits," AIG's response said.

A committee spokesman said the four largest insurers cited by Rep. Waxman as providing Defense Department contractor DBA cover are AIG, Chicago-based CNA Financial Corp., Philadelphia-based ACE USA and Warren, N.J.-based Chubb Group of Insurance Cos.

Chubb wrote less than 0.5% of the premiums cited and did so only to accommodate its insureds, a spokesman for the insurer said.

A spokesman for ACE declined comment.

The report said CNA paid out 8% more in claims and expenses than it collected in premiums. CNA insures contractors for the U.S. State Department, the Army Corps of Engineers and the U.S. Agency for International Development. But CNA has just 10% of the insurance market in Afghanistan and Iraq, the report states.

The other governmental agencies, those covered by CNA, employ a different insurance procurement method. Following a competitive process, the three agencies select a single DBA insurer that provides fixed rates for all their contractors. The Defense Department allows civilian contractors and subcontractors to negotiate their own insurance purchases.

The Government Accountability Office said eight Defense Department contractors were paying $10 to $21 per $100 of payroll for DBA insurance, John K. Needham, the GAO's director of acquisition and sourcing management issues, told the committee. State Department and AID contractors, meanwhile, paid $2 to $5 per $100 of salary.

Through a December 2005 pilot program, the Defense Department now pays $3.50 to $7.25 per $100 of salary using a single insurer, Mr. Needham said.

Committee members expressed frustration that the Defense Department had not expanded the pilot program. But Rep. Tom Davis, R-Va., said a single insurer may not be willing to provide coverage for the entire Defense Department contractor risk.

Committee members also questioned recent allegations that two Iraqi contractors working for the Army Corps of Engineers were billed for insurance they didn't purchase. The details of the alleged practice emerged through routine contract oversight, James Dalton, chief of engineering and construction for the Army Corps of Engineers told the Committee last week.