Billion-dollar profits and a 47 percent rate increase?

Aug 11, 2008

South Marion Citizen–August 11, 2008
State Farm Florida Insurance Company has filed a request to boost homeowner rates by an average of 47 percent, and in some parts of the state the insurer is requesting increases of as much as 70 percent. This request shows that despite recent legislative actions, the property insurance crisis in the state is not solved.

Last year, the company announced it was dropping 50,000 policies, and earlier this year, State Farm Florida announced it is no longer writing new homeowner policies.

In justifying the huge increase, State Farm Florida claims that since 2000, it has spent $1.20 in claims for every $1 it has earned in premiums, and that it must build reserves to be able to pay claims should the state suffer from a major hurricane.

These statements need careful scrutiny from regulators, particularly given the lack of recent hurricane activity and the healthy returns at the parent company, State Farm, which owns the Florida subsidiary.

The parent company earned $5.5 billion in 2007, up from $5.3 billion in 2006, and recent Florida actions have been aimed at reducing the risk to private companies operating in the state.

Through the property reinsurance fund, Florida has offered insurance companies reinsurance backed by the state, and the state-backed Citizens Insurance Company has taken on higher-risk policies rejected by private insurers.

In its filing, State Farm says that it has purchased reinsurance from the state reinsurance fund, but the company has not seen a significant drop in reinsurance rates.

The company needs to provide hard facts to justify this assertion because one way Florida-only insurance subsidiaries of major national insurers transfer money to their parent companies is through buying reinsurance from the parent rather than from the state reinsurance fund.

Private insurers operating in the state deserve the opportunity to earn a reasonable return on their investment, but at the same time homeowners need to be sure that the rates their insurers charge are fair and are based on sound actuarial data rather than simply on corporate profit goals.