Posted on 11 Feb 2010
Saying the request is "unreasonable," Louisiana Insurance Commissioner Jim Donelon has rejected a request from State Farm Fire and Casualty Co. for an average 19.1 percent increase in homeowners premiums in the state.
In reality, the request by State Farm, the state's largest residential insurer with 27 percent of the market, would have meant that some people would have seen rates go down while others would have seen rates rise by as much as 44.4 percent. The highest end of a rate request range typically applies in hurricane-prone South Louisiana.
Donelon said his department often recommends that insurers adjust their requests, but an outright rejection is fairly unusual.
"This is an out-and-out rejection," Donelon said. "We're so far apart, we don't feel like there's a reasonable chance for compromise."
State Farm, which is free to submit a new request, said that it was stunned and disappointed by the rejection.
"We didn't expect this at all," said Molly Quirk-Kirby, a public affairs specialist for State Farm in Louisiana. "We are going to continue to have conversations with the department because we feel as though this rate filing was justified and needed."
If the request had been granted, State Farm would have been able to collect an additional $67.6 million from its customers in Louisiana.
Donelon's rejection is the culmination of a battle that has been brewing over the past year over State Farm's use of a hurricane computer model that seems to project a need for much higher rates than its competitors.
For the past few years, the Consumer Federation of America has been warning about the use of computer catastrophe models, because they function as a "black box" that is generally too complex for overworked state regulators to decipher, and give companies ready-made justification to ask for more money. Programming in computer models used to be fairly standard, but in recent years, some companies have started changing their assumptions about the frequency and intensity of storms, creating more dire projections of loss risks.
While companies say that these changes are necessary to account for growing risks in a world of changing weather patterns, the Consumer Federation has been concerned that modelers are using junk science to create models with the scariest projections so companies can justify higher rates.
Donelon said that last spring, State Farm requested to raise rates in Louisiana by a statewide average of 14 percent. In attempting to justify that request, State Farm supplied estimates from three computer modeling firms: RMS, AIR Worldwide and Eqecat. The loss projections from RMS and AIR were pretty close, but the Eqecat figures called for a 28 percent increase. Donelon rejected the Eqecat figures, and took the higher of the two remaining estimates, ultimately granting State Farm a statewide average rate increase of 8 percent.
But the company came back almost immediately with the 19 percent rate request, and again used the Eqecat figures as justification. "Basically for the same reason, we said we're not going to allow that," said Donelon, who informed the company of his decision with a press release issued late afternoon Wednesday.
Quirk-Kirby said that State Farm believes that Eqecat does give an accurate prediction of its rate needs, and has been trying to educate the insurance department about the validity of the model and how it works.
But Donelon said the Eqecat model wasn't the only problem he had with State Farm's filing.
The company had two bad quarters of losses and asked to use a shorter window of time focusing on those two quarters to project its loss experience into the future, rather than using the standard four-year period.
And, as a large financial firm, State Farm buys some reinsurance, or insurance to cover a portion of claims in the event of a catastrophe, from other companies, but the company also provides some reinsurance coverage to its own insurance entities. On that portion of reinsurance by State Farm for State Farm, Donelon the company wanted to include profits as a reinsurance cost in a way that wasn't acceptable. "It's too heavily loaded with profit," Donelon said.
Since Hurricane Katrina, the insurance department has had several battles with insurers over the way they calculate rates. Allstate, for example, tried to leave provisions to cover the cost of wind damage in rates for policies that didn't offer any hurricane coverage, prompting the department to ask all insurers to justify how the calculate rates for "x-wind" policies. In 2007, the insurance department also rescinded rate increases from Hanover Insurance Co., the Hartford Financial Services Group Inc. and American National Property and Casualty Cos. after it realized that they had used a different hurricane model that the department also found questionable.
Donelon said that the use and impact of catastrophe models is an increasingly hot topic with the National Association of Insurance Commissioners, which is considering coming up with a model of its own so it can check the findings of other models against its own. "It's been a major issue of discussion," Donelon said.