State Farm pressed on rate hike

Regulators demanded explanations from State Farm as it defended its 47.1 percent rate-increase request at a public hearing.

BY BEATRICE E. GARCIA
Miami Herald–August 13, 2008

Regulators grilled State Farm officials Tuesday, demanding explanations to justify the 47.1 percent rate hike the insurer says it needs to pay future claims.

Those rate increases would be significantly higher for its policyholders in South Florida.

For instance, a $300,000 home built before 2001 in Broward could see its premiums increase 80 percent to $23,414. In Miami-Dade, policyholders could expect an average 63 percent hike to $21,514 for a home of the same value.

At a public hearing in Tallahassee on Tuesday, the company said its revenues have been depleted by the high cost of reinsurance and by the large mitigation credits it has been forced to give. Without higher rates, State Farm contends its financial condition would deteriorate dramatically this year and the next. As the largest private insurer in the state, State Farm insures about one million homes.

”Mother Nature has made all of our lives difficult and we cannot control the number or intensity of hurricanes that could make landfall this year or next year,” said Jim Thompson, president of State Farm Florida.

Despite State Farm’s assertions, some public officials aren’t totally convinced.

Gov. Charlie Crist said he hopes that Insurance Commissioner Kevin McCarty kills the proposed rate increase.

”Enough is enough,” Crist said. “I’m very pleased with Commissioner McCarty’s work. I think he’ll handle this case appropriately and I think you know what I mean by that — rejecting it, the increase.”

Steven Alexander, an actuary for the Florida Consumer Advocate, told officials from the Office of Insurance Regulation that State Farm is attempting to use future premiums to recover past losses, specifically to cover a $750 million surplus note from its parent company.

State Farm Mutual replenished the Florida company’s capital after it was wiped out by the 2004 storms. State Farm said it hasn’t been paying interest on that note because of its deteriorating financial condition.

State law requires that rates be set to cover future losses, not past claims.

During the hearing, both Belinda Miller, deputy insurance commissioner, and Steven Parton, OIR’s general counsel, asked why State Farm’s reinsurance costs are so high when it buys a large portion of its backup coverage from the Florida Hurricane Catastrophe Fund, whose rates are below those of the private market.

State Farm officials said the company also buys a substantial amount of reinsurance from its parent company, giving it the capacity to pay claims for more than $9 billion.

It pays $500 million for that coverage.

Miller said that the parent company made a handsome profit in the past two years on its reinsurance sale to the Florida company because there were no hurricanes and the coverage wasn’t tapped.

From questioning by Parton and Bob Lee, an OIR actuary, there’s concern that State Farm may have manipulated the results of three state-approved risk models. Jeff McCarty, State Farm’s actuary, said the company just averaged out the results of the models in figuring its rate increase.

Parton and Lee indicated that ”averaging” the results might not comply with state law on the computer models. Lee noted that while the three models were approved by the state, insurers aren’t supposed to modify the results.

Parton wondered why State Farm had to use three models, perhaps because each gave different results.

Parton also questioned State Farm’s increasing acquisition costs that includes advertising and branding, especially at a time when it’s not writing new homeowners policies in the state.

If McCarty denies the rate increase, State Farm can appeal the decision to an administrative law judge.

During the hearing, Kathy Popejoy, State Farm Florida’s pricing director and actuary, said the company planned to drop at renewal thousands of additional policies beyond the 50,000 it discussed with OIR last October.

However, after the hearing, the company said that was a mistake and it only planned to drop the initial 50,000 policies at renewal.

This report was supplemented with material from The Associated Press.