Allstate defends rates, says they were too low

Feb 5, 2008

Posted on Tue, Feb. 05, 2008–Miami Herald


As a special Senate committee began two days of hearings with state insurance officials and insurance company executives, Allstate Floridian’s chief executive explained that the company didn’t pass on savings from its reinsurance purchases directly to policyholders because Allstate’s rates already were inadequate.

Joseph Richardson told the committee Monday that the hurricanes of 2004 and 2005 wiped out its surplus. Its parent company, Allstate Corp., stepped in then, but the Florida-based insurer needs higher rates to rebuild capital, he said.

The massive insurance reform bill passed a year ago expanded the state’s catastrophe fund to provide less expensive back-up insurance, or reinsurance, to insurers. Insurers were required to pass on those savings to policyholders in the form of lower rates. But only 68 percent of the 118 home insurers in the state have lowered rates so far — and the savings were less than expected in most cases.

The purpose of the Senate Select Committee on Property Insurance Accountability is to determine why rates haven’t fallen as much as expected. The panel heard from Allstate Floridian and Nationwide Insurance Company of Florida on Monday, but Allstate Floridian got the bulk of the attention.

Senators spent more than four hours questioning Allstate officials about how the company factored profits into its rates, how it used the computer models to determine rate increases, and how much it paid for reinsurance in recent years. Allstate requested a 42 percent rate hike when it provided its final filing in September.

The panel, led by Sen. Jeff Atwater, R-North Palm Beach, and Sen. Steve Geller, D-Cooper City, asked again and again why Allstate bought more reinsurance last year and how much it paid for it, even though it has dropped tens of thousands of homeowners policies. Indeed, Allstate had about 500,000 homeowners policies in 2004; now it has about 200,000 policies.


”Every time you drop someone on the coast, you are reducing risk and profit is increased,” said Sen. Bill Posey, chairman of the Senate Banking and Insurance Committee.

Ron Stouffer, Allstate Floridian’s assistant vice president, said the company spent more for reinsurance in 2007 than in 2006 because the company perceived greater hurricane risk.

The senators were also concerned about Allstate’s use of a computer model for forecasting losses that wasn’t approved by the state. This model uses a shorter-term outlook and could produce a forecast of bigger losses because it incorporates more recent hurricane activity. It also considers new research that forecasts increased hurricane activity due to warmer sea temperatures.

The senators questioned Allstate on whether the company intentionally used the short-term model in its 2007 rate filing to produce a higher possible loss and then justify a higher rate increase.

”Many scientists believe that we are in a period of increased sea surface temperature, which they believe will cause an increased likelihood of hurricane formation,” Richardson told the committee. “Prudent business judgment dictates that this increased risk of hurricane formation should be taken into consideration.”

Allstate executives said the company had adjusted its rate filings in 2006 and 2007 using data from the unapproved short-term computer model. Richardson said the company believes Florida statutes don’t specifically preclude using the unapproved model.


Allstate officials were more forthcoming with answers Monday than they were a month ago when Florida regulators sought documents as part of its investigation into Allstate’s rates. Regulators tried to suspend Allstate from writing any new policies, and an appeals court is considering the issue now.

Even so, responses on Monday didn’t always please the panel. ”I haven’t seen so much bobbing and weaving since Muhammad Ali did the rope-a-dope,” said Posey. “When we get the nebulous answers, it just gives me more questions.”

Like Allstate, Nationwide executives painted a picture of how difficult it is to operate in storm-prone Florida.

Jeff Rommel, regional vice president of Nationwide’s Florida operations, said the company showed a net loss of $307 million over the past 20 years on its homeowners business in this state. Even counting a profit in writing auto insurance, the company still had a net loss of $169 million over that period, he said.

Nationwide had been awarded an average 54-percent rate increase last March by an arbitration panel. Following the provisions of the new law, the company’s rate increase came down to 21.4 percent.

Yet Rommel said “in 55 of 67 counties in Florida, [Nationwide] customers now have rates lower than the industry average.”

Information from The Associated Press was used in this report.