Insurance costs hit home, for all of us – including the good neighbor and LA Insurance Commissioner Donelon, too

“One thing is certain.  The more we all spend on insurance, that’s less money that we spend on other things, like cars, and refrigerators, and clothing.  Until the problem is solved, our recovery will never be complete…”

WLOX reporter Doug Walker hit the road for a week in January to learn more about the insurance situation and found Insurance costs hit home, for all of us.

During my travels, I met a widow whose insurance bill has climbed from $2000 a year in 2004 to more than $7000 now.  Another homeowner was told his insurance was going up from $2400 a year to $6300.  He finally got a policy through an independent broker with Lloyd’s of London for $4000.  The list goes on and on.

Indeed, the list does go on and on and, as Walker points out, insurance cost is not just a Mississippi issue.  State Farm found that out yesterday and Rebecca Mowbray caught the story for the Times Picayune – Insurance Commissioner Jim Donelon rejects 19 percent statewide rate increase request by State Farm.

“This is an out-and-out rejection,” Donelon said. “We’re so far apart, we don’t feel like there’s a reasonable chance for compromise.”

State Farm, which is free to submit a new request, said that it was stunned and disappointed by the rejection…

If the request had been granted, State Farm would have been able to collect an additional $67.6 million from its customers in Louisiana. (emphasis added)

State Farm’s requested increase would have pulled $67,600,000 from Louisiana’s economy.  Calculated for the items listed in Walker’s post,  there would be  2380 fewer new cars purchased or 56,333 new refrigerators sitting in stores – or, worse yet,  the 781,403 school-age Who Dat’s would not be wearing a replica of Drew Brees’ Super Bowl jersey.

Donelon’s rejection is the culmination of a battle that has been brewing over the past year over State Farm’s use of a hurricane computer model that seems to project a need for much higher rates than its competitors.

For the past few years, the Consumer Federation of America has been warning about the use of computer catastrophe models, because they function as a “black box” that is generally too complex for overworked state regulators to decipher, and give companies ready-made justification to ask for more money…the Consumer Federation has been concerned that modelers are using junk science to create models with the scariest projections so companies can justify higher rates.

Donelon said that last spring, State Farm requested to raise rates in Louisiana by a statewide average of 14 percent. In attempting to justify that request, State Farm supplied estimates from three computer modeling firms: RMS, AIR Worldwide and Eqecat. The loss projections from RMS and AIR were pretty close, but the Eqecat figures called for a 28 percent increase. Donelon rejected the Eqecat figures, and took the higher of the two remaining estimates, ultimately granting State Farm a statewide average rate increase of 8 percent.

But the company came back almost immediately with the 19 percent rate request, and again used the Eqecat figures as justification. “Basically for the same reason, we said we’re not going to allow that,” said Donelon, who informed the company of his decision with a press release issued late afternoon Wednesday.

But Donelon said the Eqecat model wasn’t the only problem he had with State Farm’s filing.

Some suggest one of Donelon’s other problems was his need for votes in the upcoming 2011 election. Elected officials always learn to count better the year before they’re up for reelection; so, it’s no surprise that Donelon said what Louisiana voters want to hear, When I say 1, you say 2. When I say win, you say for you. … 1! 2! Win! For you!

State Farm, which is free to submit a new request, said that it was stunned and disappointed by the rejection.

“We didn’t expect this at all,” said Molly Quirk-Kirby, a public affairs specialist for State Farm in Louisiana…

The company had two bad quarters of losses and asked to use a shorter window of time focusing on those two quarters to project its loss experience into the future, rather than using the standard four-year period.

And, as a large financial firm, State Farm buys some reinsurance, or insurance to cover a portion of claims in the event of a catastrophe, from other companies, but the company also provides some reinsurance coverage to its own insurance entities. On that portion of reinsurance by State Farm for State Farm, Donelon the company wanted to include profits as a reinsurance cost in a way that wasn’t acceptable. “It’s too heavily loaded with profit,” Donelon said.

Was State Farm really surprised? Donelon is certainly not the first to question the Company’s reinsurance cost. Sop reported questions raised in Florida in a December 2008 post on SLABBED that quoted from the proposed order of Florida Administrative Law Judge Daniel Manry:

Transactions between State Farm Mutual and State Farm Florida for reinsurance and credit risk provisions totaling approximately $561.8 million, when viewed in the light of economic reality………may be transactions which State Farm Mutual engages in with itself and which lack any independent economic significance. Transactions with no independent economic significance would be sham transactions which may distort the economic costs of the reinsurance and credit risk provisions purchased from State Farm Mutual. Such economic distortions may enable the group to derive a rate advantage from the legal form in which State Farm Mutual chooses to do business in Florida.

A whopping 65% of State Farm Florida’s reinsurance cost that year was paid to drum roll State Farm Mutual!

More background on State Farm’s reinsurance program is in the SLABBED archive, including the blasts from the past listed below:

More Evidence of Slabberator Misuse: The Farm’s “Sham Transactions”, Zurich’s Sham Reinsurance Deals

Has the Cat Bond Market Seized Up? The (sub)Prime Answer is Affirmative. $2.8 Billion of Missing Merna Re Cat Bonds? Is State Farm’s Reinsurance Program Worthless?

Tying up a few loose ends – Florida puts State Farm on the ropes

of paper moons and cardboard seas – first “the scheme” now State Farm reveals “the scam”