Consumer advocate seeks State Farm rate cut of 40 percent

St. Petersburg Times--August 11, 2008

By Tom Zucco, Times Staff Writer

TALLAHASSEE — Instead of facing a proposed 47.1 percent average increase in property insurance premiums, State Farm’s nearly 1-million customers statewide should see rates cut almost 40 percent, according to Florida’s insurance consumer advocate.

Bloomington, Ill.-based State Farm, which has nearly 100,000 policyholders in the Tampa Bay area, is squaring off with regulators in a hearing today. If its request is approved, the new increase, which could be as high as 91 percent in parts of Pinellas County, would take effect starting March 1, 2009.

Stephen Alexander, an actuary with the consumer advocate’s office, wrote in a draft report to regulators that State Farm, Florida’s largest private insurer, says it needs the rate hike because the company has paid out $1.20 in claims and expenses for every $1 collected in premiums.

"However, it is important to recognize that State Farm’s prior history of hurricane losses is irrelevant," Alexander writes. "State Farm’s own actuaries acknowledge this by using hurricane models rather than actual hurricane experience to predict future hurricane losses. Rates should not be set to recover prior years’ losses. "

The report also notes that State Farm should not be allowed to add a 6 percent expense load to prospective rates to repay a $750-million loan it obtained from its parent, State Farm Mutual, after the 2004 hurricanes.

"It is just an attempt to recover past losses," the report reads, "and amounts to nothing more than an additional profit loading."

Alexander wants State Farm to explain why its net cost of reinsurance, or backup coverage, has increased even though global reinsurance market rates have come down. And it wants to know why the company bought more coverage from the Florida Hurricane Catastrophe Fund, why it has reduced its coastal exposure through nonrenewals and why it has stopped writing new business.

Alexander said his analysis indicates that if State Farm used the same profit and reinsurance provisions today that it used in 2004, then the company should reduce its rates by 39 percent.

State Farm spokesman Justin Glover said Alexander’s report was not surprising, "since the consumer advocate’s office generally opposes rate increases, even those approved by (regulators).

"This is a draft report," Glover added. "We hope the office will take advantage of the opportunity to discuss their concerns with State Farm at (today’s) hearing."

If regulators deny State Farm’s request, the company can withdraw the filing, refile or appeal.