State Farm’s rate request may hide motives

St. Petersburg Times--July 18, 2008

By Tom Zucco, Times Staff Writer

By most accounts, the odds are remote that State Farm will win approval to raise homeowners insurance rates an average of 47.1 percent statewide.

“I know I will do everything I can,” state Sen. Mike Fasano, R-New Port Richey, said Thursday, “to see they don’t get one dime of an increase.”

So what’s really going on here? More precisely, as some state officials suggest, is Florida’s largest private insurer asking for such a large increase so it has an excuse to drop far more than the 50,000 policyholders it is currently shedding?

State Farm insists it has no plans to drop more policyholders and says it is losing money in Florida and needs the higher rates to pay claims should major hurricanes hit the state. The company has already stopped writing new policies in the state.

In a letter Wednesday to Florida regulators, State Farm executive Kathy Popejoy said the company could justify a statewide increase of 67.6 percent, more than 20 percent higher than what was requested. The most significant contributing factor, the letter reads, is a state-mandated doubling of the discounts homeowners receive for hardening their homes.

But according to several lawmakers and state officials, State Farm has a brutal fight on its hands, primarily because all insurance companies have been mandated to buy cheaper backup coverage from the state for the next two years and pass the savings on to policyholders.

Lawmakers also passed a measure that requires insurance companies to notify the state in advance if it plans to drop more than 10,000 policies.

“They (State Farm) did it because they don’t want the policies to begin with,” Fasano said. “Instead of dropping them and getting bad public relations, they said they needed a big rate increase.

“They know they won’t get that, so they’ll blame the governor, the Legislature and the regulators, and say they’re being forced to drop policies because they didn’t get the rate, when they had every intention of dropping the policies in the first place.”

Fasano, a member of a Senate Select Committee on Insurance Reform, said the state has the ability to step in and stop State Farm from writing its lucrative auto and life insurance lines of business.

But it’s because of those other lines, said Bill Newton, executive director of the Florida Consumer Action Network, that State Farm would want to remain a major player in Florida. “They’re looking at their overall business model,” Newton said. “It’s more like delicate pruning (of policies) than a wholesale exiting.”

If State Farm eventually did drop thousands of policyholders, Florida Chief Financial Officer Alex Sink doubted most would end up in Citizens because newer, smaller companies could fill the void.

“Many Florida-based insurers have raised capital and are hungry to do business here,” Sink said. “I’ve given up on these big companies. They were too greedy in the first place. No company should have a 30 percent share of the market. We should have 30 companies with a 3 percent share. We should quit crying and do everything to nurture and grow the companies that are here.”

Homeowners like Mary Ann Thompson are being forced to learn quickly about such alternatives. Last week, after 20 years, State Farm canceled its policy on Thompson’s St. Petersburg home.

“I always felt loyalty to them,” Thompson said. “But not now. We had our auto policies with them, and we’re going to change.

“You wouldn’t expect them to cancel policies and raise rates at the same time.”