State Farm to Coast: Get ready to grab yer ankles



We’ll talk State Farm in a minute. It’s a small pleasure to me that readers of Slabbed can tell you in a single sentence why we’re being devoured by insurance companies – they operate regional monopolies, and keep them going by purchasing judges, legislative bodies, and regulators who could take away the anti-trust exemptions. Coached by people like McKinsey & Co., we know how big insurers follow a scripted Machiavellian model:

risk transference is sales pretext only;

the objective is profits;

claims threaten profits;

policyholder dollars go to defeat, not pay claims;

↑ premiums + ↓ scope of coverage = ↑ profits.

America is being eaten from within. Wall Street pigged-out and bankrupted our treasury. Health insurance pigged-out and drove consumers to go uninsured and file bankruptcy in record numbers (62% of all). Banks pigged-out and destroyed home values and credit markets, and auto makers cowboyed a world class manufacturing business into oblivion. On the legal side, so-called “pro business” types – mere bribe payers to me – replaced the jury system with forced arbitration, repealed punitive damage law and bought off the appeals courts. If our Constitution was a car note, I’d say we’re “upside down.”

At the moment, the Machiavellian health insurance model is under attack. In recent months, health insurance monopolies have forked out $380 million in new Congressional bribes to protect their profit model. Their business model: sell a promise to cover medical bills, exclude most medical needs and all pre-existing, don’t pay claims, keep the money. It’s a simple but solid racketeering strategy that spits out money like an ATM machine run amuck. In the seven years from 2000 to 2007, profits rose 428%, while insurers steadily shrank coverage.

Ok, on to State Farm’s latest. We know Mississippi paid a severe price for ignoring decades of flagrant corruption between regulators, ISO and big insurance. And, by the time everyone found out our commissioner-approved policy forms were rigged with a trap door (“ACC” clause), it was way too late, and Katrina had wrecked the world. A third of Mississippi’s economy was destroyed. So here we sit in the detritus, three of the most productive counties in Mississippi torn asunder, de-populated, and broke.

But not to State Farm. They think there’s some profit taking still to be had. A “Cat market” is an area recently depleted by a major catastrophic event, like a hurricane, earthquake, flood, tornado, etc. Cat markets are not robust hunting grounds for new profit, and to most insurers, they’re a pain in the ass. However, there is a strategy called “whipsawing” that’s sort of akin to “fracking” an old oil field to tease out hidden reserves.

“Whipsawing” works like this. First, insurers make a huge and very public case that they’ve paid out so much in claims in the depleted Cat market they must either raise premiums, or leave the market altogether. The intended effect is to frighten homeowners, and hence “whipsaw” their acquiescence to a rate increase. The commissioner has a scripted role. He pretends at first to take a dim view of the rate increase, and issues a press release or two questioning it all. (Actually, he has no intention of reigning in the monopoly, for God’s sake, they put him in office). A few scared homeowners may appeal to the commissioner: “what will they do if the insurance company pulls out . . . where will they get coverage?” The commissioner issues new press releases saying we must retain the insurers, no other carriers will write coverage in this Cat market. When the theatric part is over, the commissioner and the insurer go to work on granting the rate increase.

Right now State Farm wants a 45% increase in Jackson, Harrison and Hancock counties. The scripted theatrics are still playing out at the moment. This week Chaney told the Clarion-Ledger: “I can’t see the justification,” . . . but added, “We’re negotiating with them, and we’re going through the process.” State Farm spokesman Roszell Gadson said the 45% is “what the company needs to effectively do business in Mississippi.”

Mississippi elected Republican Mike Chaney as the new insurance commissioner in 2008. If his campaign report is right, Republican organizations put up $1,067,295.14 to purchase the office for him. It worked. One of first official things Chaney did was whitewash a market conduct examination of State Farm’s Katrina fraud. Insurance commissioners have a couple of important powers. One is power to conduct a “market conduct exam” which comes with subpoena power. The other is license suspension. An insurance commissioner can subpoena near bout anything an insurance company has, and can suspend the license of a racketeering insurer and ban them from the state. Of course none of this matters when Mississippi is like Mexico, and the government is essentially third world.

There are other troubling aspects of “whipsawed” rate increases in depleted Cat markets. Insurers and banks have so hijacked our legal system that the purchase of insurance is no longer voluntary. Homeowners have no choice on whether to buy insurance. If they want to finance the purchase of a home, they must buy insurance. Yet the irony is, excluding the furniture and what not, the insurance policy primarily protects the bank, not the homeowner. The benefit to the homeowner is mortgage payoff, which is the benefit to the bank. So what does the bank care if the insurer whipsaws rate increases, they’re not the one paying. Homeowners can’t protest by dropping coverage, this could trigger a mortgage default, or alternatively, “force placed” insurance.

I hate to say it, but Coast homeowners get ready, Guido’s coming through the neighborhood in the next few weeks, and he’s lookin’ for ‘da percentage . . . if ya know what I mean.

2 thoughts on “State Farm to Coast: Get ready to grab yer ankles”

  1. Bam-Bam: One other thing I’d like to see you address in a follow-up posting is the issue that “investment” profits play in the equation. There was a time when responsible underwriting meant that you collected more in premium dollars than you paid out in claims (and busines overhead). However, some time after I graduated from law school in 1971, a “new” bunch of people took over the insurance industry, ie. “beancounters”. These people were interested in “cash flow’, ie. premium dollars that could be invested to generate inflated returns, and “real” claims-handling insurance professionals were relegated to dinosaur status. The beancounters didn’t really care how much was paid out in claims, because the Company would show a profit as a result of the investment of available CASH, with claim payments paling in comparison to investment income. This was all “well and good” as long as the stock market remained strong, but when it didn’t… Well we all know the result(s). Also, I’d like to know your views about why companies like State Farm and others would voluntarily write risks like those that exist on the Mississippi Gulf Coast, Florida and Placquemines and St. Bernard Parishes, and portions of New Orleans. Why are people permitted to live in such storm-vulnerable and flood-prone areas, and why do corporations and their Boards of Directors, who owe duties to their shareholders, write insurance on property in such areas, where losses are not a matter of “if”, but “when”? Thank you.

  2. BamBamBigelow does it again . . . and again . . . and again. Brilliant! Awesome! Riveting! More, BamBam. More, please.

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