Tightening scrutiny of insurance rate filings

BY BEATRICE E. GARCIA

The Miami Herald

Insurance companies operating in Florida often complain about the regulatory system in the state. Their view: There’s too much regulation. Another problem, they claim, is that insurance laws change often in this state.
That last complaint is certainly true, especially since eight hurricanes crisscrossed the state in 2004 and 2005. Lawmakers have passed four major reform bills in less than three years. The biggest changes came in the law drawn up during the 10-day special session in January.

As head of Florida’s Office of Insurance Regulation, Kevin McCarty and his staff have had to make sure the requirements of the January reform bill are being met. The problem is that many policyholders throughout the state haven’t seen the significant savings regulators and lawmakers had expected.

In a conversation last week with The Miami Herald, McCarty explained OIR’s new course as regulators began examining insurers’ rate filings this spring. Indeed, on Friday, his office rejected hefty double-digit rate increases for Allstate Floridian and three sister companies, just one day after a public hearing where the company tried to make a case for its request.

Q: OIR has issued subpoenas to several insurers, including State Farm and Allstate, to provide additional information as the department begins to look beyond the normal rate filings. What started OIR down this road?

A: A number of things led the office to come to the conclusion that we needed to broaden our review beyond the simple rate filings. There was the frustration with the early filings that came through in the aftermath of the special session. We had done an analysis similar to what was done during the special session. We weren’t seeing those savings realized in the rate filings.

We also found a pattern of behavior that gave us some concern. First, there was the use of the five-year RMS [Risk Management Solutions, a computer modeling firm based in Newark, Calif.] model that hasn’t been accepted by Florida. [Computer models provide insurers with estimates of possible damage in a region after a storm, taking into account factors including population density, age, location and type of structures.] Second, there was the increased purchase of reinsurance and increased profit [level] that companies were asking for.

We wanted to broaden [our review] to include some of the key partners for the insurance industry: the reinsurance brokers, the reinsurers, the rating organizations and, of course, the modeling companies. We want to see if there is a common thread of activity or actions that, in concert, would attempt to frustrate the legislative intent that was expressed during the special session.

As things evolve, we will be looking for administrative remedies but also potential criminal remedies if we broaden our investigation to include law enforcement.

Q: Isn’t there a problem with insurance companies using the RMS five-year hurricane model that hasn’t been approved by the Florida Hurricane Loss Prevention Methodology Commission?

A: A hearing in Washington, D.C. [on catastrophe modeling] did highlight the huge debate of the reliability and accuracy of the five-year plan. The five-year projection is significantly higher than the loss costs [projected] by any of the other [computer models] that use a longer time horizon. It’s a reasonable conclusion that it’s being used to generate higher loss costs.

But we want to know what combination of entities is making the request [to use the five-year model]. That’s why we’re asking if it was the rating organizations, the primary companies, the reinsurers or the reinsurance broker. We’re trying to see if these pieces inter-relate. We’re just at the beginning of this process.

Q: Can OIR require insurers to use the public model, developed with state tax dollars, as the basis for all rate filings?

A: I’m not so sure that we want to limit all loss cost [projections] to the OIR model. But we run all the data through the public model anyway before we approve a rate filing. We find it to be one of the best out there.

But it’s such a blatant disregard for the rules and laws of Florida for an insurance company to come in and demand to use the five-year model that has been rejected by the state to generate higher loss projections and double the amount of reinsurance they’re buying.

They’re basically sticking their finger in the eye of the Florida Legislature, saying we reject the changes that were made in the special session.

Q: Many critics of the insurance industry would say that Florida regulators and lawmakers have been very accommodative to the industry for many years. Is that so?

A: Look at how the Florida government and the Department of Insurance responded in the aftermath of Hurricane Andrew. Insurance companies demanded a much higher deductible for wind losses. They also demanded the expansion of the windpool [underwriting] association. They demanded that assessments for the windpool not be passed on to the policyholders in the state.

But the response we’re constantly hearing from the industry is ”you either do what we need or we will leave.” Yet our every response has been: ”What can we do to reinvigorate the private market?” I think we’ve done a lot.

Then we go through a series of hurricanes and the industry response is to dramatically reduce the amount of coverage in Florida. [During the special session], the Legislature expressed its frustration after all we’ve done to build markets in Florida.

Q: What’s changed now?

A: Now, the regulatory framework has changed.

We have eliminated the industry-friendly arbitration panel. We have instituted a prior approval provision [on rate filings]. We have a state law requiring that companies certify the accuracy of their information. And there’s a state law that requires companies to pass on [reinsurance cost] savings to reduce those rates. These are very significant changes that the Legislature has made.

But we’re still out there without market development. Having a healthy, pro-consumer regulatory framework isn’t necessarily in opposition to a marketplace that is friendly to new business. That’s the balance we’re trying to achieve in Florida.