Frustration at insurance rate hearing

Article Courtesy of The Miami Herald


Published February 6, 2008

A second day of hearings to determine why many homeowners haven't seen the rate decreases lawmakers promised last year brought some familiar frustrations and a few surprises.

The special Senate panel on Tuesday heard from Florida Farm Bureau and Hartford Insurance Group. Both companies pointed to higher costs for back-up insurance, or reinsurance, as one of the reasons they couldn't pass on substantial savings to their policyholders.

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

What left some senators practically speechless was CEO John Auer telling the panel that it was ''easy to do the math'' to calculate its savings from the catastrophe fund. The company filed its rate cut four days after the new law was signed.

''I thought you would be wearing hats today. Somebody told me you were the white hat guys,'' said Sen. Steve Geller, D-Cooper City, co-chair for the special committee.

The company also lowered its rates another 9.5 percent later in the year, mostly to due to paying a lower cost for additional reinsurance it purchased in the private market, fewer claims and better cost controls.

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

And while Auer, who sits on the catastrophe fund's advisory council, said the company uses the computer models extensively to gauge its exposure and concentration of policies in certain areas of the state, it only uses the state-approved model for its rate filings.

Sen. Jeff Atwater, R-North Palm Beach, the committee's other co-chair, jokingly asked Auer if American Strategic ``was interested in acquiring any other insurance companies in Florida.''

Unlike many insurers, American Strategic said it is writing new homeowners policies, even some on the coast. It also insures older homes, though it has a larger percentage of new homes on its books, and some condo associations.

The company has a combined total of 260,000 policies, making it the third-largest insurer behind Citizens Property Insurance, the state-run company, and State Farm, the largest private insurer.

''You must the largest company no one has ever heard of,'' said Geller, who admitted that he wasn't familiar with American Strategic until the Senate panel began to draw its list of witnesses.

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

Auer said the company, started 10 years ago, has already lived through some of the highs and lows in the reinsurance market, noting that reinsurers are pleased with American Strategic's management.

Auer also said he had no conversations with A.M. Best about buying additional reinsurance or what models to use for setting its rates.

And A.M. Best raised American Strategic's rating to A-minus from B++ last December.

''So far, we think you skipped rope-a-dope 101,'' Sen. Bill Posey, R-Rockledge, referring to his comment Monday after the ''bobbing and weaving'' from Allstate and Nationwide as they provided the panel with some evasive answers Monday.

American Strategic's appearance at the end of the day was a welcomed relief after the panel had grilled Florida Farm Bureau and the Hartford Insurance Group.

For three hours, officials from Gainesville-based Florida Farm Bureau answered questions on why its reinsurance costs rose dramatically last year and led to a rate hike request.

A law passed last January required insurers to pass on savings to policyholders if they bought the reduced-cost back-up insurance from the state's catastrophe fund.

Much of the morning's discussion centered on why Florida Farm Bureau bought the extra reinsurance. Like Allstate Insurance and Nationwide, which testified Monday, Farm Bureau used an unapproved model to determine how much reinsurance it needed.

The short-term model considers a shorter time span to forecast possible future hurricane activity. Florida Farm Bureau used this model in setting its rate request. It produced a much larger probable loss for the company if a massive storm hit the state -- $525 million versus a $347 million possible loss based on the company's calculations in its previous rate filing.

The company bought additional reinsurance to cover a much bigger potential loss.

Melissa Shelley, the company's actuary who prepared the rate filings last year, admitted the short-term model ``results in higher losses, which would drive rates up if we included the entire reinsurance costs in our rates.''

''We didn't pass on the additional reinsurance costs to policyholders,'' Shelley said.

Belinda Miller, Florida's deputy insurance commissioner, said regulators were concerned about the factors that led to the higher reinsurance costs and a demand for a rate hike.

Florida Farm Bureau initially filed a rate decrease of nearly 25 percent right after the new law was passed. These rates were effective June 1. But when the company calculated its reinsurance costs and other factors, it asked for a rate increase.

The Office of Insurance Regulation rejected Farm Bureau's rate filing and the company has had a hearing before the Department of Administration. No decision has been rendered so far.

Sen. Mike Bennett, R-Bradenton, questioned why Florida Farm Bureau bought extra reinsurance even though the number of policies on its books dropped slightly last year.

Shelley said, ''The insurer automatically increased the insured value of homes as each policy comes up for renewal to account for inflation,'' thus the need for more reinsurance.

Steve Parton, general counsel for OIR, acknowledged that the state has no control over reinsurers and the rates they charge.

Officials from the Hartford Insuruance Group told the Senate panel that it won't renew 27,000 policies -- about one-third of its homeowners book of business in Florida -- to reduce its exposure in this state.

The renewals will start in August and run about one year. Hartford will be left primarily with homeowners policies that it has sold through AARP.

Thomas Johnston, senior vice president and chief actuary for the Hartford Insurance Group's property and casualty division, said the AARP policies have an indefinite renewal guarantee.

Johnston noted that Hartford lost about $500 million due to the losses from the storms of 2004 and 2005. Though the company was profitable in 2006 and 2007, the company needs a few more good years to make up its losses.

Although OIR had issues on the profit factor and the amount of reinsurance purchased by Hartford, this was the first company to appear before the Senate panel that didn't use the unapproved short-term model.