State Farm Rate Increase Request Prompts Questions By Florida Office of Insurance Regulation

 

Represented by Property and Casualty Deputy Commissioner Robin Westcott, Property and Casualty Product Review Deputy Director Michael Milnes, Actuary Bob Lee, General Counsel Belinda Miller and Assistant General Counsel Rhoda Johnson, the Florida Office of Insurance Regulation (“OIR”), conducted a public rate hearing today, February 15, 2011, to review State Farm Florida Insurance Company’s (“State Farm’s”) recent rate filings for its homeowners and commercial multi-peril residential coverage lines.  To view the agenda, click here.

State Farm is requesting an average increase of approximately a 28 percent for its residential property line and approximately 98 percent for its rental dwelling line.

In order to immediately begin responding to questions from the OIR officials, State Farm executives waived their opportunity to make an opening statement.

Mr. Lee asked whether State Farm’s requested rate increase was due to sinkhole-related losses, to which State Farm representatives affirmed that, although sinkhole-related costs prompted a large portion of the increase, it was not the entire cause.  The representatives also advised that State Farm’s rental dwelling line did not provide coverage to businesses.

Turning to issues relating directly to State Farm’s requested homeowners line increase, Mr. Lee asked the insurer’s representatives whether it is accurate to say that 28 percent of State Farm’s homeowners policyholders would receive more than a 50 percent increase in premiums.  In their affirmation, the representatives said that it also was reasonably accurate to attribute this to a territorial effect.  Notwithstanding, approximately 105,000 State Farm policies will concurrently experience either a reduction or no change in rates, they added.

In regard to whether State Farm would non-renew policies with sinkhole coverage and then renew them with catastrophic ground cover collapse coverage, the State Farm representatives indicated that the company indeed intends to take this action; however, the timing has not yet been finalized.

Ms. Westcott asked the State Farm representatives to explain their company’s financial position Florida, which is the basis for the requested rate increase.  The State Farm executives explained that State Farm’s surplus has been drastically reduced, even with no hurricanes having recently impacted Florida.

Referencing a submitted exhibit indicating that State Farm is stating sinkhole losses of $327 million over the past five years, Mr. Lee pointed out that this stated loss is but a fraction of the requested rate increase, to which the State Farm officials responded that sinkhole losses are accelerating and becoming a larger proportion of total Florida losses.

Mr. Lee also asked the State Farm officials to justify the requested rate increases in certain locations that are normally regarded as wind-prone areas, but that have non-wind loss ratios below the statewide average.  According to the State Farm representatives, the loss ratio in these areas is misleading.  Mr. Lee indicated he believed the company’s calculation in this area is “lacking credibility.”

Ms. Miller inquired about the proposed rate increase impact on policyholders, saying she believes it would cause customers to cancel their State Farm policies and rush to Citizens Property Insurance Corporation.  If this were to happen, she asked whether State Farm agents would refer their policyholders to other private insurance companies.  The State Farm representatives did not respond to her question.

Ms. Miller also asked whether State Farm had estimated the impact on its total rate if a substantial number of customers cancel their policies as a result of a rate increase.  While State Farm had not attempted to estimate this contingency, the company officials explained that they believe any loss of premium due to cancelations in response to the rate increase would, in turn, be offset by the rate increase.  Ms. Westcott indicated that, if a rate increase were to be granted, the OIR would appreciate State Farm agents being as helpful as possible in placing policies with other private companies.

The discussion moved to State Farm’s requested increase for its rental dwelling rate, for which the territorial effect was also cited as a major factor in the proposed premium increase.  The State Farm representatives indicated that, by increasing rates, they were attempting to be responsive to actuarial indicators of ability to pay claims after a major event.  The company’s most recent rate filing for its rental dwelling line was in April of 2005.

At today’s hearing, questions were raised about State Farm’s intent to immediately implement the rate change, instead of allowing for an implementation period.  Ms. Miller indicated that applying a transition period to implement this filing would have a positive impact on market stability, so the public would not think that the OIR requires immediate implementation of the new rate. 

As to why State Farm’s expense increase in the rental line was so much greater than that stated in its homeowners filing, the company representatives said that the disparity is due to rental premiums being so much less expensive.  The State Farm representatives affirmed that the company plans to non-renew sinkhole-related coverage and instead offer catastrophic ground collapse coverage.

Florida Insurance Consumer Advocate Terry Butler and Florida Insurance Consumer Advocate Actuary Steve Alexander also attended the hearing.  In their report, they chose to only address State Farm’s homeowners rate filing, due to the small number of policies impacted by the rental dwelling rate increase.  Their evaluation addressed three issues:

• What constitutes an appropriate operating and selling expense?
• How much contingent capital should State Farm provide?
• What should the average policy discount for sinkhole coverage be?

Mr. Butler stated that State Farm’s pre-reinsurance direct losses were about 26 percent of its premium.  Its per-policy expenses in Florida, he added, are significantly higher than comparable statistics throughout the rest of the country.

State Farm’s selling expense, which is primarily composed of agent commissions, was the greatest discrepancy found in the filing by the Florida Insurance Consumer Advocate’s Office, reported Mr. Butler. This expense has grown with increases in premium, he explained, and he believes the commission rate should, instead, decrease accordingly.

Saying that the amount of surplus that State Farm indicated it would dedicate to Florida is inflated, or potentially unnecessary, Mr. Butler suggested on behalf of the Florida Insurance Consumer Advocate’s Office that State Farm should share surplus proportionately among all states in which it does business according to a 250-year probable maximum loss calculation.

Mr. Butler also stated he believes that State Farm’s inclusion of sinkhole-related losses in the “other coverages” category for non-hurricane losses was inappropriate.

Mr. Alexander noted that no action should be taken on the filing until State Farm’s sinkhole losses are stated independently.  He also said that the discount indicated by State Farm to account for the difference in risk between non-renewed sinkhole coverage that would be replaced by catastrophic ground cover collapse coverage should be around $320 per policy, not the $150 as stated in the filing.

Mr. Alexander concluded that, if State Farm brought its selling expense, surplus assumptions and sinkhole adjustments into line with the Insurance Consumer Advocate’s suggestions, a rate reduction should actually result.

The State Farm officials indicated that they had no response to this statement, unless the OIR panel had additional questions.

In regard to a query from Mr. Lee about the company’s higher-than-average selling expense, the State Farm officials indicated that this is because Florida is a labor intensive market and requires greater compensation.

The hearing was then concluded.

 

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