Florida Insurance Hearings: Not Every Company is Losing Money

We noted in our continuing coverage of the Florida Senate Hearings concerning their property insurance mess that Allstate used unapproved short term weather models to make actuary decisions on the purchase of reinsurance. Those poor business decisions have caused losses for Allstate’s Florida operating company, losses they now wish to dump on Florida consumers.

Allstate has since been joined by Nationwide and Farm Bureau in admitting the use of unapproved short term models to drive reinsurance purchase decisions. Farm Bureau also admitted losses deriving from that fact.

In a refreshing change, we have a story from the Miami Herald that Florida based American Strategic Insurance testified Tuesday they used approved long term models and have profited from the better decisions that resulted from that fact.

American Strategic, a St. Petersburg company that managed to cut rates an average 11.5 percent due to the money it saved by buying a portion of its reinsurance from the Florida Hurricane Catastrophe Fund.

The company also lowered rates another 9.5 percent later in the year, mostly because it paid a lower cost for additional reinsurance bought in the private market and had fewer claims and better cost controls.

”Generally speaking, apples to apples, reinsurance costs were coming down for everyone in 2007,” said CEO John Auer, who expects to see another drop this year.

Unlike many insurers, American Strategic said it is writing new homeowners policies, even some on the coast. The company has 260,000 policies, making it the third-largest insurer behind state-run Citizens and State Farm.

Sen. J.D. Alexander, R-Winter Haven, questioned American Strategic’s heavy use of reinsurance to cover potential losses. He asked if it would be in financial trouble if its reinsurers, especially the state catastrophe fund, couldn’t make good on their
policies.

Auer said the company, started 10 years ago, has already lived through highs and lows in the reinsurance market, noting that reinsurers are pleased with American Strategic’s management. And A.M. Best raised American Strategic’s rating to A-minus from B++ last December.

As I opined on the Allstate Yahoo Finance Message Board, the testimony of Allstate, Hartford, Farm Bureau and Nationwide Insurance reminded me of the confessions of an accomplished three card monte dealer. They expect their customers to foot their mistakes; both the mistaken decision to purchase more reinsurance and the decision to buy expensive reinsurance at all for that matter, rather than the cheaper variety offered by the State of Florida. Is insurance the only line of business that doesn’t have to pay for their business mistakes? In the small business world where I come from there is no government backstop save bankruptcy so the concept of profit entitlement is foreign to me.

In any other line of business the shareholders, not the public would be eating these business mistakes. So while we congratulate American Strategic and their owners for their ability to profit while their competitors languish we also hope free market principles apply equally to those who make bad business decisions.

Simply put there is a point where the insurance industry needs to take ownership of their mistakes. The mess in Florida illustrates exactly why so few present day insurers would survive in a truly competitive marketplace without that anti-trust exemption they currently enjoy. Our position is that the free marketplace should reign supreme where ever possible and the culture of big insurance profit entitlement should end.

Finally the events in Florida now have me wondering if our state regulators here in Mississippi have been hoodwinked by similar tactics. Our wind pool premiums are in the stratosphere, largely due to the astronomical cost of reinsurance. Given what we have learned through the application of Sunshine to the insurance industry by the Sunshine State, I challenge Mr. Chaney to hold rate hearings for any increases in property insurance, not just those he arbitrarily deems too high. We have quickly arrived at the point where he should put the interests of the citizens of this state ahead of the profit interests of these out of state insurance companies.

sop

Allstate Before the Florida State Senate: Squealin’ Like a Pig!

Welp folks, them crooks at Allstate can run but they can’t hide and they is now before the Florida State Senate tryin’ to explain how they cook the books. From readin’ the story and comments after the story them boys best find a new shade of lipstick to slather on that Pig in the Poke they is tryin’ to sell, ’cause from the sound of it them Florida Senators ain’t buyin’ in to the BS. Hats off to our own Sop who pegged BS weather models as one way them crooks fleece the public. Them posts, includin’ the first one on this here blog are found here and here.

Allstate tells why it didn’t drop rates

BY BEATRICE E. GARCIA

As a special Senate committee began two days of hearings with state insurance officials and insurance company executives, Allstate Floridian’s chief executive explained that the company didn’t pass on savings from its reinsurance purchases directly to policyholders because Allstate’s rates already were inadequate.

Joseph Richardson, who was appointed to his current position last March, explained that the 2004 and 2005 storms wiped out the company’s surplus. While capital was replenished by its parent company, the Florida-based insurer sought to rebuild that capital through higher rates.

A massive insurance reform bill passed last January required insurers to pass on savings achieved by buying less-expensive back-up insurance from the state’s catastrophe fund.

The purpose of this special committee’s investigation is to determine why rates haven’t fallen as expected.

The bill expanded the state’s catastrophe fund to provide less expensive backup insurance for insurance. Insurers who bought this reinsurance were required to pass on the savings to policyholders in the form of lower rates. Only 68 percent of the 118 home insurers in the state have lowered rates so far.

Senators spent more than four hours questioning Allstate officials about how the company factored profits into its rates, how it used the computer models to determine how much of a rate increase it needed, and how much and what it paid for reinsurance in recent years.

The panel asked again and again why Allstate bought insurance and asked for a large rate increase last year, even though it has dropped about half of its homeowners policies since 2005.

Allstate requested a 42 percent increase when it provided its final rate filing required by the new law last September. In a preliminary filing in March, Allstate had said it would lower rates an average 14 percent.

The company is also showing a loss of $47 million for the first nine months of 2007, though there were no major storms. Allstate reported net income of $28 million in 2006.

Sen. Jeff Atwater, R-North Palm Beach and co-chairman of this panel, said it was ”just a little perplexing” that the company has perceived greater risk, despite insuring few homes, many of which have withstood many, many hurricanes or are built to the higher standards of states building code.

”Every time you drop someone on the coast, you are reducing risk and profit is increased. You’ve set up for the worst-case scenario,” said Sen. Bill Posey, chairman of the Senate and Banking Committee.

Bonnie Gill, Allstate Floridian’s vice president, explained that Allstate’s rate-making process is based on losses it expects to incur on customers in the next year. It doesn’t include customers that the company will no longer carry on its books.

Indeed, Allstate had about 500,000 homeowners policies in 2004. Now the company has about 200,000 homeowners policies.

Belinda Miller, deputy insurance commissioner, said that was one of the reasons that the Office of Insurance Regulation questioned Allstate’s profit factor in its rate filing because it has dropped so many policies and intends to drop more.

”That should theoretically produce a decline in rate need,” said Miller.

Ron Stouffer, Allstate Floridian’s assistant vice president, said the company spent more for reinsurance in 2007 than in 2006 because the company perceived greater hurricane risk.

The senators were concerned about Allstate’s use of a computer model used for forecasting future hurricane losses that wasn’t approved by Florida. This model uses a shorter-term outlook and could produce a forecast of bigger losses because it incorporates more recent hurricane activity. The state approved model looks at hurricane activity over 100 years or more.

Allstate executives said the company had adjusted its rate filings in 2006 and 2007 with data from the unapproved short-term computer model.

Richardson said the company believes Florida statutes don’t specifically preclude using an unapproved model.

Insurance Weather Modeling – Others Have Questions Too

Last week I posted a couple of different links to stories on the use of weather modeling in setting insurance rates. I shared some questions that are stuck in my mind on the reliability of the long range forecast. Given the magnitude of coastal insurance rate increases since Katrina struck, the issue of whether consumers of insurance are being treated fairly on price and the use of weather modeling to justify drastic price increases was addressed last week as well in the Boston Globe.

HOME INSURANCE rates are skyrocketing on Cape Cod, the islands, and in other coastal areas. Driving the increases are concerns by insurers that a major hurricane could wreak the kind of devastation that hurricanes have brought to other parts of the country. Some companies have simply stopped insuring in shore areas, forcing homeowners into the state’s FAIR Plan, the insurer of last resort.

But Massachusetts need not simply accept this price spiral, because the state has options for making insurance more affordable. One is for state officials to take a closer look at the models of hurricane devastation that insurers use to justify their higher rates.

Companies hold these “black box” models closely, but a legislative commission recommended earlier this month that state officials seek access to them. The panel called for a new “independent public entity” to study the reliability of the models. Two members – state Senator Robert O’Leary of Barnstable and state Representative Eric Turkington of Falmouth – went further, calling for the state to create its own model or require that any private model be open to review by the attorney general. Such efforts make sense; rates for a product that homeowners have little choice but to buy ought to be based on defensible criteria.”