TBO.com - TBO is Tampa Bay Online

Regulators Question State Farm's Plan To Raise Rates

ADVERTISEMENT

By RUSSELL RAY | The Tampa Tribune

Published: August 12, 2008

TALLAHASSEE - Skeptical state regulators grilled executives of State Farm Florida this morning, as the state's largest private property insurer defended its request to raise home insurance rates nearly 50 percent on average.

Jim Thompson, president of State Farm Florida, said the company is losing money in Florida and won't be able to cover losses from a major hurricane without a substantial increase in homeowners rates.

"We need to increase our rates as soon as possible," Thompson said during a public hearing held by the Office of Insurance Regulation. "Our current pricing is far below expected costs. We need to be able to pay for hurricane losses when the winds do blow."

But regulators questioned the formula State Farm used to calculate potential losses from a major hurricane and its need to purchase $9.2 billion of reinsurance, enough to cover the losses of a one-in-250-year storm.

More than half of the company's reinsurance costs — $4.6 billion — is purchased from its parent company, State Farm Mutual.

"For the last two years, you haven't had storms," said Deputy Insurance Commissioner Belinda Miller. "So for the last two years, the parent has made substantial amounts of money on that reinsurance premium."

State Farm Florida pays its parent company about $550 million a year in exchange for the backup coverage.

Thompson responded by saying the reinsurance arrangement, over the long haul, has not been profitable for the parent company.

"State Farm Mutual has paid out more than they have collected in premium," Thompson said. "They have not generated any profit from that relationship."

In determining potential losses from a hurricane, State Farm Florida used an average from three state-approved hurricane-loss models.

But that's not how regulators want companies to determine their losses. In effect, State Farm used an unapproved process by averaging the three hurricane-loss models to determine potential losses, said Steve Parton, general counsel for the regulation office.

"Each of those models give a different result," Parton said. "Because each one is different is why you were using three models."

State Farm has nearly 100,000 policyholders in Pinellas and Hillsborough counties. Under State Farm's proposal, homeowners' rates would rise as much as 91 percent in Pinellas County. In Hillsborough County, rates would rise between 23 percent and 25 percent.

Reporter Russell Ray can be reached at (813) 259-7870 or rray@tampatrib.com.

Loading Comments...

Email Print

ADVERTISEMENT