Florida Office of Insurance Regulation Reviews Castle Key Insurance Rate Increase Requests

 

The Florida Office of Insurance Regulation (“OIR”) held a public rate hearing on July 27, 2010 to review the rate increase requests of Castle Key Insurance Company and Castle Key Indemnity Company (“Castle Key”), which companies are requesting overall statewide increases of 33.3 percent and 17.9 percent, respectively, for their residential property lines of business.

Formerly known as Allstate Floridian Insurance and Allstate Floridian Indemnity, the Castle Key companies continue to be subsidiaries of Allstate Insurance Company. 

Castle Key is seeking rate increases based on its cost of reinsurance and the increasing costs associated with paying homeowners’ claims.  The companies currently write approximately 250,000 policies in Florida. 

OIR officials present at the hearing included Deputy Insurance Commissioner for Property and Casualty Belinda Miller, Deputy Director for Property and Casualty Product Review Michael Milnes, Actuary Bob Lee and Assistant General Counsel Rhoda Johnson. 

Present from the Office of the Florida Insurance Consumer Advocate were Florida Insurance Consumer Advocate Sean Shaw, Actuary Steve Alexander and Senior Attorney Terry Butler. 

Castle Key executives in attendance included Assistant Vice President Bonnie Gill, Actuaries Robin Haworth and Shantelle Thomas and Legal Counsel Robert Simmons.

To substantiate the need for the rate increases, Castle Key’s representative reviewed the actuarial indications in Castle Key’s rate filing.  Following the company’s presentation, OIR’s actuary asked a series of questions, which in part revealed that Castle Key’s filing does not include sinkhole coverage.  Rather, this coverage would be an optional endorsement that would be available if the policyholder elects to purchase it for an additional premium.  According to Castle Key, the exclusion of sinkhole coverage in its calculations did not have an impact on the loss trends in the rate filing. 

Although it noted that Florida presents a greater risk of loss, Castle Key’s filing applied a 10 percent rate of return.  However, the OIR’s actuary suggested that the 10 percent might be excessive, and that all segments of a rate filing had to be supported by complete documentation.  One unique aspect of Castle Key’s filing is that it includes higher building code-related policy discounts compared with the industry standard.

Mr. Alexander summarized his review of the filing on behalf of the Insurance Consumer Advocate, concluding that, although a rate increase of 15.4 percent for Castle Key Insurance Company is appropriate, there is no need for a rate increase for Castle Key Indemnity Company.  In his analysis, Mr. Alexander used a much smaller profit and contingency factor for the Castle Key Indemnity Company.  He also noted that there is no evidence that Castle Key is writing new business in Florida.

Following the testimony, Ms. Miller concluded the hearing, for which the record will be held open until August 3, 2010. 

Media coverage of the hearing is reprinted below.

 

Should you have any comments or questions, please contact Colodny Fass.        

 

Blog:  Allstate subsidiaries grilled about proposed rate hikes

By Julie Patel
July 28, 2010
Sun-Sentinel.com

Officials from Allstate’s Florida subsidiaries spent two hours Tuesday fielding questions at an Office of Insurance Regulation hearing in Tallahassee on their request to raise statewide rates by an average of 33 percent and 18 percent.

The Allstate Floridian insurance companies, which changed their names to Castle Key last year, have about 250,000 policies, making them Florida’s third-largest private home insurer. Nearly three-fourths of those policies are with Castle Key Insurance, which is proposing the higher increase and the rest are with Castle Key Indemnity.

The Insurance Consumer Advocate’s office recommends a rate hike of 15.4 percent for the larger company and rate decreases for the smaller one. “With this rate change, our customers can have greater confidence that we will have the…funds to pay all their claims,” said Bonnie Gill, a vice president for the companies, adding that the companies’ premiums haven’t kept pace with expenses since 2007.

The average proposed increase for Castle Key Insurance works out to $412, or $34 a month, for policyholders and the average increase for Castle Key Indemnity works out to an extra $243, or $20 a month, according to the company. Bob Lee, an OIR actuary, grilled Castle Key representatives on several points:

Why didn’t the companies include information on how they calculated estimates included in its rating filing? This issue came up with several parts of the rate proposal. After Lee’s questions about the company profit margin, for instance, he said the company needs to justify every part of its proposed rates in the proposal it submits to regulators. “When you make a rate filing in Florida, you certify all material information is in the filing and it’s all there, which means yours expectations and assumptions…are not very relevant,” he said. Estimates can’t just be “picked out of the air,” Lee said during another part of the hearing.

Why don’t the company’s projected losses take into account the fact that its claims payouts for sinkhole damage could decrease and that its discounts will be smaller? About a year ago, the company started dropping coverage for minor damage such as cracks from sinkholes unless a policyholder requested the coverage. So only 4.5 percent of its policyholders now have the coverage as opposed to 100 percent before the change. Gill said the impact on projected losses is not clear enough yet because there are still some policies that have only been without the coverage for a few months. “Certainly the frequency has dropped off,” she added. Later in the hearing, Steve Alexander an actuary for the Insurance Consumer Advocate’s office noted a similar issue. He said the company’s projections of its losses rely too much on a trend from 2007 to 2009 where premiums dropped dramatically. He showed why he thinks that’s a result of the state’s move during that time to double discounts for homeowners who fortify their homes against hurricanes. But insurers are rethinking the size of the discount now so Alexander said premiums should rise.

Did the company use the risk provision models required under state law? “It was our understanding that we could use a method other than the prescribed Florida method as long as sufficient support was provided,” said Shantelle Thomas, an actuary for Castle Key. “It’s not likely we’ll consider this part of the filing as it is,” Lee said.

Does the company’s proposed 8.8 percent profit margin take into account the fact that so much of the potential catastrophe risk it takes on is transferred to reinsurance companies, which sell insurance to insurers? A company’s potential profit typically reflects the amount of risk it takes on. “Most entities don’t have a large transfer of risk,” Lee said, adding that Castle Key is including the cost of the reinsurance as an expense that it will directly pass to customers through rates. Robin Haworth, a technical actuary for Allstate, said the parent company takes a “holistic” approach to its profit and aims to earn a 10 percent profit overall. “We don’t adjust those by business unit,” he said. But if it did, he said he would think the Florida companies would be riskier, so the profit would be higher. “I don’t think that’s extravagent for Florida homeowners,” he said, adding that the reinsurance is considered in that the company would need more of it if it had less cash.

Why did the company include an annual rate of return on investment from 2008 instead of more recent information? “Wasn’t 2008 pretty much the height of the financial crisis?” Lee said. “We used information that was most recent at the time we were working on the filing,” Haworth said, adding that the 2009 information is similar.

Why are the companies’ costs of advertising and agent commissions so high given one of the companies isn’t selling new policies? “It’s been a long time since [Castle Key Insurance] has written any new business,” Lee said. “So you’re allocating a cost to acquire busines at the same level as a company not acquiring new business?” he said, asking why the larger company’s policyholders should pay for advertising and other costs related to getting new business. Gill said a large part of the so-called acquisition costs are also used to continue helping existing customers, who come up for renewal every year. Some advertising is “meant to remind our customers of the strength of the company, the value that they’re getting with the policy,” she added.