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StateToWeigh 47% Rate Hike
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Published: August 12, 2008
State regulators are set to begin dissecting State Farm's request to raise home insurance rates an average of 47.1 percent statewide at a highly anticipated public hearing in Tallahassee today.
Industry experts will be keeping a close eye on the hearing to see how receptive the state is to the new rate proposal. State Farm is the largest private property insurer in the state, with more than 1 million policyholders, and the outcome could signal how the agency may respond to rate increase proposals from other companies.
At today's hearing, regulators will begin questioning State Farm officials about the proposed increase, and the public will have a chance to weigh in on the company's plan that would raise property insurance premiums - in some cases more than 70 percent.
The request from State Farm suggests the property insurance crisis in Florida is far from over.
State officials vowed to halt the skyrocketing cost of home insurance after the hurricanes of 2004 and 2005, but State Farm and other insurers argue their rates aren't high enough to cover catastrophic claims that would result from a major hurricane hitting Florida.
"Insurers do not file rate requests unless they believe there's an actual and demonstrable need," said Robert Hartwig, chief economist for the Insurance Information Institute.
State Farm has more than $9 billion in reinsurance coverage, enough to cover the losses of a historic hurricane, or what's called a one-in-250-year storm. Reinsurance is backup coverage insurance companies buy to cover catastrophic claims. As a company's reinsurance costs rise, higher premiums typically are collected to cover the cost.
Buying reinsurance for a one-in-250-year storm may be excessive, an argument Insurance Commissioner Kevin McCarty and his staff have used against other insurers.
But insuring for a storm of that size is the responsible thing to do for State Farm and its policyholders, Hartwig said.
"To minimize the probability of ruin to a number in the vicinity of one-in-250 years is completely reasonable, given its fiduciary responsibility," he said. "It's completely acceptable for the state-run insurer to go bankrupt because they can effectively tax everybody in the whole state. That cannot happen with a company like State Farm, which has millions of policyholders all over the country."
Heavy Scrutiny Expected
After two consecutive years without a major storm hitting the state, State Farm's rate proposal is expected to be heavily scrutinized by the Office of Insurance Regulation.
State Farm Florida earned $108 million in 2007 and $134 million in 2006, but those profits could easily be wiped out by a single hurricane, Hartwig said.
"The homeowners insurance market in Florida has historically been a large-scale money loser for the industry overall," he said.
For example, State Farm says it has paid $1.26 in claims and expenses for every $1 collected in premiums in Florida since 2000. By the end of 2009, the company expects to be paying $2 for every $1 collected.
According to State Farm, it won't be long before the company's cash surplus falls below the level it needs to cover the risk it has taken on in Florida.
"Rates will need to rise, and/or risk will need to further decrease," State Farm stated in its filing with regulators.
Translation: If State Farm isn't satisfied with the new rate approved by regulators, it may drop thousands of policyholders in Florida. State Farm could deepen Florida's insurance crisis through a massive cancellation of policies.
McCarty, in an interview last week, said smaller insurance companies will play a bigger role in meeting Florida's insurance needs.
Since 2006, 30 new property insurers with $3.8 billion in capital have entered the Florida market, filling some of the void created by big insurers that have stopped writing new policies or have been dropping thousands of policyholders in the state.
"State Farm and Allstate are not going to write more policies for more premium. They've made that very clear," McCarty said. "So what we have to do is to rely on the smaller companies. We're very comfortable with that model."
Smaller Insurers Join Market
But state Rep. Dennis Ross, R-Lakeland, said smaller insurers are "thinly capitalized" and probably won't be able to pay claims should a major hurricane strike.
Ross said he's concerned that the number of insurance companies rated for financial strength by insurance-rating agencies is shrinking in Florida.
"We have fewer rated insurance carriers than we've ever had," said Ross, a member of the House Insurance Committee.
Home insurance rates should be raised in Florida because they don't reflect the increased risk of loss or the escalating value of property in Florida, Ross said. What's more, higher rates would encourage the private market to shoulder more risk and give homeowners more options, he said.
"We've had suppressed rates for quite some time, which has led to little competition," Ross said.
Unleashing the forces of a free-market system on Florida's troubled insurance market would be a mistake, McCarty said.
"As long as people are forced to buy homeowners insurance as a determining condition of their mortgage, and as long as companies have no responsibility in terms of their quality of service, I think we need to bring some equilibrium to the marketplace," McCarty said.
State Farm's rate increase proposal will be the first handled under new state rules that promote transparency and fairness in Florida's rate-making process. The new rules were approved this year in legislation authored by Ross.
In the past, the Office of Insurance Regulation could deny a company's rate request without explanation, Ross said.
"How they assessed it was secret," he said. "We didn't have actuarially sound rates because OIR, for whatever reason, could say we're not going to approve this."
The new rules encourage regulators to use actuarial standards in determining rates. If those standards are ignored, regulators must disclose that they deviated from actuarial principles, Ross said.
State Farm, which accounts for more than 20 percent of Florida's homeowner policies, has nearly 100,000 policyholders in Pinellas and Hillsborough counties.
Under State Farm's proposal, premiums in Pinellas County would rise between 56 percent and 91 percent. In Hillsborough County, the range is 23 percent to 25 percent.
Although State Farm is seeking a significant increase in rates, the insurance market in Florida has improved, McCarty said.
"The majority of homeowners' rates have gone up, but I've seen peoples' rates come down," McCarty said. "And most of the time, it's by shopping and comparing rates."
Reporter Russell Ray can be reached at (813) 259-7870 or rray@tampatrib.com.
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