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Analyst: Insurer Turning Back Clock

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By RUSSELL RAY

The Tampa Tribune

Published: August 13, 2008

TALLAHASSEE - State Farm Florida wants to raise home insurance rates nearly 50 percent statewide, but its proposal is loaded with excessive costs and profits, Florida's consumer advocate said Tuesday.

Steve Alexander, an actuary with the state consumer advocate's office, told regulators that State Farm's plan is an attempt to recover its hurricane losses from 2004 and 2005 and is thus "inconsistent with the prospective nature" of rate-making.

"If investors lose money, they should not expect a return of their investment from their customers," Alexander said during a public hearing held by the Office of Insurance Regulation. "Actuarially sound pricing is not based upon the recovery of prior years' losses."
State Farm is Florida's largest private property insurer, with more than 1 million policyholders. The insurance giant has nearly 100,000 homeowners policies in Hillsborough and Pinellas counties combined.

Premiums for some homeowners in Pinellas County would rise as much as 91 percent under State Farm's proposal. The range is much lower in Hillsborough County, where rates would rise 23 percent to 25 percent. If approved, the new rates would take effect in March.

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 told regulators. "Our current pricing is far below expected costs. We need to be able to pay for hurricane losses when the winds do blow."
State Farm Florida has more than $800 million in cash, but that surplus is quickly diminishing, Thompson said. State Farm has paid $1.20 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.

"Though we have proposed 47.1 percent, an increase of over 60 percent is justified," Thompson said. "We seek your approval of a lesser amount even though we do not expect this to be adequate to cover all of our costs."
State Farm Florida's proposal includes the recovery of a $750 million loan from its parent company, State Farm Mutual, Alexander said.

"This profit loading is an attempt to make State Farm Florida policyholders pay back the hurricane losses of 2004 and 2005," he said.

Alexander said State Farm's request for substantially higher rates is based on losses and gains in Florida and does not include results from other states. Nationwide, State Farm's losses are minimal, he said.

Regulation office officials also 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, 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."

Also, the reinsurance purchased from the parent company is priced lower than reinsurance sold in the private market, he said.

Regulators also questioned the method State Farm used to determine a potential hurricane loss of $9.2 billion. In calculating those losses, State Farm Florida used an average from three state-approved hurricane-loss models.

But that's not how regulators want companies to determine 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 Rep. Don Brown, chairman of the House insurance committee, said Tuesday's hearing illustrated the contentiousness between state regulators and the private insurance market in Florida. Brown said the state should back off and let the free market work.

"A much simpler way would be to allow competition to regulate rates," Brown said. "It won't ever happen in Florida under this current system."

The regulation office is expected to issue a decision soon, although there is no deadline for a final ruling.

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

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