Legislators set to ask insurers why savings weren’t passed on to homeowners

Feb 4, 2008

Legislators set to ask insurers why savings weren’t passed on to homeowners

Hearings will address why savings weren’t passed on to homeowners

By Julie Patel

South Florida Sun-Sentinel

February 3, 2008

Have insurers inflated homeowner policy prices in Florida to pad profits or are their rates justified by the state’s track record of costly hurricanes?

State senators on a panel formed to hold the state’s property insurers accountable will press insurance company executives for answers during hearings Monday and Tuesday in Tallahassee.

The hearings start the next chapter in a battle between state government leaders and the property insurance industry.

A year ago, the Legislature drew a line in the sand: It passed legislation that provided insurers with a cheaper financial safety net to insure Florida properties, and in exchange it demanded the insurers pass along the savings by cutting homeowner coverage prices. But insurers generally have resisted the substantial rate reductions state officials wanted.

Gov. Charlie Crist ended last year with a public threat to sue the insurance industry. State Insurance Commissioner Kevin McCarty began 2008 by trying to ban Allstate Insurance Co. and nine affiliates from selling new insurance policies statewide until they turn over all the financial documents McCarty’s office wants as part of an insurance pricing investigation. Last month, a state appeals court blocked McCarty and now the two sides are locked in litigation.

“We’re taking on massive multinational giants with few resources. … The deeper we dig, the more questions we have,” said Sen. Steve Geller, D-Hallandale Beach, co-chairman of the Senate Select Committee on Insurance Accountability.

The future of the Florida Hurricane Catastrophe Fund — expanded by legislators early last year to offer more, cheaper backup insurance to property insurers — may hinge on the outcome of the Senate committee hearings. Florida Chief Financial Officer Alex Sink and several leaders in the state House of Representatives have called for scaling back the fund because of the potential risk it poses to Floridians if major hurricanes strike. If the fund runs out of money, all of the state’s residents have to pay to replenish it.

Expanding the fund and forming the special Senate committee are among a series of steps that legislators and regulators have taken in the past year to try to reduce insurance prices that soared after hurricanes in 2004 and 2005.

There has been some success. The Office of Insurance Regulation approved statewide rate cuts that average 14 percent for about 17 percent of the state’s property insurance policies and it plans to approve cuts of 2 percent to 22 percent on average for half of the state’s policies. The office rejected rate increases for about 33 percent of the state’s policies; that means lower, approved rates are in effect for those policies.

“Some legislators are going to jump all over” insurers at the hearings, said Sam Miller, executive vice president of the Florida Insurance Council. “But most will see that the system worked the way it was supposed to.”

Legislators will direct the sharpest questions at the Hartford Insurance Company of the Midwest, Allstate Floridian Insurance Co. and Florida Farm Bureau General Insurance Co. Each of the companies asked for rate increases last year.

Sen. Jeff Atwater, R-North Palm Beach, co-chairman of the new Senate committee, said he wants to know what changes last year caused insurers to increase rates.

“Why now? Why this year?” he asked. “I think we’ll benefit from hearing the reasons and logic behind that.”

Below are snapshots of what committee members hope to glean by grilling executives of five insurance companies. The insurers were selected for the hearings because their pricing practices are in question or the Senate panel could use them to provide a contrasting or unusual perspective.

Allstate Floridian
The company asked for a statewide average rate increase of 22 percent.

Senators are expected to ask Allstate officials why they adjusted their risk projections with a “near-term model” for five years, even though it is not approved by state regulators, and whether the move helped the company justify higher rates or buying more reinsurance last year.

Either move implies the company hoped to use the savings for its own benefit rather than for consumers, said Bob Hunter, director of insurance for the Consumer Federation of America.

Allstate Floridian spokesman Adam Shores said the company started using the short-term model in 2006 — before the state reinsurance program was expanded — because it calculated the next few years are part of the hurricane cycle with more storms, a theory that has been widely debated by scientists. Shores said the company asked to raise rates in part to make up for proposed increases that were not approved the year before.

Hartford Insurance Co. of the Midwest
The company asked for a statewide average rate increase of 3 percent.

Hartford officials may be asked why almost half of the catastrophic reinsurance they proposed to purchase last year would be for Florida. Like several other insurers, the company has been scaling back the policies it offers in Florida. Hunter said the company should reduce the amount of reinsurance it purchases for Florida as it lowers its coverage in the state.

Hartford spokeswoman Debora Raymond declined to provide details until after the hearing.

Florida Farm Bureau
The company asked for a statewide average increase of 7 percent.

Senate panelists are expected to ask Florida Farm officials what its relationship is with American Agricultural Insurance Company, a reinsurer that is considered an affiliate of American Farm Bureau. At one point, Florida Farm officials had told state regulators they couldn’t cancel the reinsurance they had agreed to buy before knowing the state was expanding its cheaper reinsurance program. Hunter said committee members may want to ask why Florida Farm Bureau couldn’t renegotiate with “this reinsurance company that deals almost exclusively with Farm Bureau companies.”

Bert Gindy, vice president government affairs and compliance for Florida Farm insurance, said the company bought more reinsurance last year than in 2006 because the cost of reinsurance stabilized after spiking the year before. But he said the company did not pass the cost to consumers.

Nationwide Insurance
The company is considered a murkier case.

It asked to lower its rates by a statewide average of 20 percent compared with its 2006 rates. But taking into account a 54 percent increase awarded to the company by a state arbitrator, its rates would have increased 23 percent.

Atwater said he applauds Nationwide officials because they “proved [they] were deserving and needed an increase to be actuarially sound … and they were still able to reduce their rates.”

Hunter suggested Nationwide may be able to pass on more savings by aiming for a 3.7 percent profit margin, as it has done in the past, instead of a 15-percent profit margin.

Nationwide spokeswoman Nancy Smeltzer said the company’s Florida subsidiary hasn’t been profitable since it was formed in 2000.

American Strategic
The company asked to reduce its rates by a statewide average of 20 percent.

American Strategic is considered an example of an insurer that passed along savings as required by the new state law.

The company was the object of accolades from state officials because it lowered rates and calculated them based on a 3.7 percent profit margin and without using risk models. Senators said they’d like to find out why the St. Petersburg-based insurer succeeded in lowering rates while others failed.

American Strategic President and Chief Executive John Auer said he hopes information that comes out at the hearings will help extinguish Gov. Charlie Crist’s rhetoric depicting insurers as “criminals.”