Regulators grill State Farm officials over 47 percent hike request

State regulators Tuesday aggressively grilled State Farm officials asking them to justify their request for a 47 percent increase to homeowners insurance rates.

Four Office of Insurance Regulation officials squared off in a Capitol hearing room at tables a dozen feet from four State Farm executives — put under oath to tell the truth — and argued about reasonable profits, discounts for protecting against wind damage, expected hurricane losses, state law and complex computer models.

For State Farm Florida’s 900,000 homeowners policyholders there are thousands of dollars in higher premiums at stake. The three-hour public hearing will be part of the regulators’ review. No decision was made Tuesday.

In addition to higher rates, State Farm is also in the midst of dumping 50,000 wind-damage policies, a process begun in March and previously announced. But executives also revealed that they intend to cancel 15,000 condo policyholders and an additional 5,000 homeowners will have their wind coverage dropped.

State Farm executives said the average 47 percent increase is necessary and actually below what computer models indicated. Company President Jim Thompson said lower income from premiums, the higher cost of reinsurance to protect against huge losses and projections of more frequent hurricanes account for the need to raise rates.

“We believe that the 47.1 percent we requested is needed if we are able to stand behind our promises,” Thompson said.

Gov. Charlie Crist earlier in the morning said he thinks Insurance Commissioner Kevin McCarty should turn down the rate increase.   

“I think he’ll handle this case appropriately and you know what I mean by that — rejecting it, the increase — and I’m pleased that over the course of the past year and a half, rates have dropped an average of 16 percent,” Crist said.

The cost of reinsurance was the biggest part of State Farm’s premium breakdown, accounting for 43 percent of its breakdown of costs. The company buys backup reinsurance from the state, from its parent company and from other private-sector sources.

Though State Farm Florida officials said the reinsurance it buys from its parent is far cheaper than what it would cost on the open market, regulators pointed out that the cost of additional coverage it has purchased exceeds the savings realized.

State Farm Florida pays more than $500 million a year to its parent company, State Farm Mutual, for coverage against catastrophic losses that would be caused by a once-every-250-years hurricane. If State Farm projections for such a large storm were realized, the company says the parent would have to pay off on about $4.3 billion in coverage claims.    Belinda Miller, deputy commissioner of the Office of Insurance Regulation, said that didn’t wash. In years without hurricanes — as in 2006 and 2007 —   those reinsurance payments are lucrative for the parent company.

“There is a transfer . . . of a half a billion dollars a year,” Miller said. “From the average person’s perspective, they would say State Farm Mutual is doing well.”