Then the competition who does not do that crap would offer lower premiums and steal business. Just like any other business that wasted money cannot compete with a business that does not waste money.
Why are profit margins only 5%? Could be many reasons, including collusion. Insurance companies have teams of lawyers whose job it is to navigate existing regulation, lobby for new ones and to push for ones that hurt competition.
Given how shady and complex the entire industry is, we don’t really have a reason to believe that 5% is an accurate number.