LOS
ANGELES, July 29, 2024 /PRNewswire/ -- Consumer
Watchdog is asking Insurance Commissioner Lara to hold a public
hearing on State Farm's new request for a 30% increase in its
homeowners insurance rates because the company wants to use the
money to improve its general financial condition, far beyond what
it needs to pay expected claims.
The proposal amounts to a $5.2
billion bailout by policyholders over the next four years,
according to Consumer Watchdog.
"State Farm's request is unprecedented in the 36 years since
voters passed Proposition 103," Consumer Watchdog said. "Under the
law, an insurance company must open its books and prove that its
financial condition warrants forcing policyholders to bankroll the
company. And the company must show that it will repay
policyholders. State Farm has done neither so far," said
Carmen Balber executive director of
Consumer Watchdog.
Download Consumer Watchdog's Petition to Intervene and Petition
for Hearing in the rate increase proceeding at the Department of
Insurance filed late Friday here and discovery
requests here.
The Petition raises concerns that State Farm's California arm, a wholly-owned subsidiary, is
sending profits out of state by overpaying the parent company for
reinsurance and services.
A hearing on the 30% rate increase is required when sought by
the public under the 1988 insurance reform initiative Proposition
103.
According to the Petition:
"The additional $1.3
billion a year for at least four years, or at least
$5.2 billion in total, [State Farm
General] wants to collect from its California policyholders would be used to
're-capitalize' the company—in other words, to purportedly rescue
the company from what State Farm describes as a deteriorating
financial condition. However, State Farm has failed to adequately
support its purported need for such an extraordinary bail-out by
policyholders, especially in light of State Farm's parent company's
$100+ billion surplus in recent years."
In its rate increase application to the Department, State Farm
acknowledges that under the standard regulatory ratemaking
formula that requires insurance companies to set rates based on
reasonable projections of future losses, the company would be
required to reduce its rates by at least 9.2%.
Instead, State Farm is seeking a 30% rate increase claiming it
needs "to protect its solvency."
However, the publicly available information reviewed by Consumer
Watchdog's experts suggests that State Farm may have engineered its
financial conditions to create the appearance of a need for a
bailout by transferring profits out of the state in the form of
"reinsurance" payments to its parent company, which is based in
Illinois.
Reinsurance, often referred to as insurance for insurance
companies, is used to transfer some of the risk of future losses to
the reinsurance company.
According to the Petition:
"Weighing against State Farm's claims [of financial distress] .
. . there is evidence that State Farm General has transferred more
than $600 million to the parent
company in 2023 in the form of inflated payments for reinsurance.
Based on past State Farm experience, it is likely that a
significant portion of the excess premium charges and inflated
underwriting profit that would result if the Application is granted
will be transferred to the parent company in the form of profits
resulting from inflated reinsurance charges."
The Petition raised additional concerns about State Farm's
extraordinary request, noting:
- Homeowners insurance policyholders in California would pay the vast majority of the
rate increase, despite the fact that "it appears that much of the
company's California losses in
recent years came from commercial and liability policies, not
homeowners. Between 2020 and 2023, State Farm had direct
underwriting profits from homeowners insurance of $1.4 billion."
- State Farm's parent company has bailed out other subsidiaries
with financial needs, so "why hasn't the parent company stepped in
to assist its affiliate financially, as it did when SFMAIC's
Texas affiliate writing homeowners
insurance encountered financial trouble years ago?"
- From 2014 to 2023, State Farm paid reinsurance premiums of
nearly $2.2 billion, but was only
reimbursed $0.4 billion – or less
than 20%. The vast majority of this was paid to State Farm's parent
company. A reinsurance return that low is "a strong indication that
the reinsuance agreement is much more favorable to the reinsurer
[the parent company] than to the Applicant." Under present rules,
insurance companies in California
are not allowed to pass the cost of reinsurance through to
policyholders. State Farm appears to be seeking to recoup
reinsurance payments through future rates.
- Despite the massive rate increase, State Farm still "intends
to decrease the number of policies written,
mostly through nonrenewals, by more than 35% from 2023 to
2028."
- State Farm has failed to disclose the details of significant
financial arrangements under which it pays its parent company for
administrative and other expenses.
- State Farm's application does not offer a detailed plan to
reimburse policyholders once its financial condition is restored,
as the regulations require.
State Farm's application for a 30% increase comes just
four months after a prior 20% ($471
million) increase in its home insurance rates took
effect.
State Farm General is California's largest home insurance company,
insuring approximately 20% of the homeowners insurance market, and
its parent company, State Farm Mutual Automobile Insurance Company
(SFMAIC), is the nation's largest insurance company by premium
dollars, with a surplus of $134
billion at the end of 2023.
Background on Proposition 103
Voter-approved Proposition 103 requires that insurers open their
books and prove they need to raise rates in a process subject to
full transparency, in which consumer representatives have the right
to review and challenge improper rates and practices.
Insurance companies must publicly disclose all the data
necessary to support their rate requests. The Commissioner must
then decide whether to approve or reject such rate applications
before they take effect. Proposition 103 also requires the
Commissioner to protect the solvency of the insurance companies
when considering rate increases.
According to the Consumer Federation of America, Prop 103
has saved California motorists
over $154 billion since 1989.
Consumer Watchdog is a non-profit, non-partisan citizen
organization founded in 1985. The organization has saved
California consumers over
$6 billion over the last 22 years by
challenging excessive and unfair auto, home, business and medical
malpractice rates.
For more information about Proposition 103
visit: https://consumerwatchdog.org/prop-103/.
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SOURCE Consumer Watchdog