By Levi Sumagaysay, CalMatters
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State Farm could soon win final approval to raise premiums for California homeowners and others on an interim basis, a move meant to help prop up the finances of the state’s biggest provider of property insurance, after a public hearing this week.
In early February, State Farm asked California Insurance Commissioner Ricardo Lara to approve emergency interim rate increases, saying the Los Angeles Country fires had worsened its financial situation as it awaited the Insurance Department’s decision on rate requests it submitted last summer. State Farm said it expects to pay more than $7 billion worth of claims from those fires.
Lara’s department and State Farm reached an agreement ahead of this week’s hearing. The outcome of an unusual rate hearing in Oakland over the past three days, overseen by administrative law judge Karl-Fredric Seligman, would make it official.
If the judge approves, starting in June the company’s customers will see average increases of 17% for homeowners — down from the 22% the insurer originally requested after it reached a deal with the California Insurance Department; 15% for renters and condos; and 38% for rental dwellings.
The judge, who gave no clear indication about his decision, is expected to issue one as soon as possible, perhaps within a couple of weeks.
If he does not approve the agreement, it’s unclear what will happen. The judge works for the insurance department, over which Lara has the ultimate decision-making authority. Lara has already conditionally approved the interim rates
At the hearing, Nikki McKennedy, assistant chief counsel for the department’s rate enforcement bureau, said during opening arguments that the interim rates were needed because “we can’t allow State Farm, with its 20% market share (in California), to go bankrupt.” She said the department “worked hard” to secure concessions from State Farm, including the reduction of the homeowner rate increase. The insurer also will get $400 million in a surplus note from its parent company, State Farm Mutual, and promised no new non-renewals of any more policies through the end of the year.
The department’s actuary, Tina Shaw, testified that she agreed with the terms of the deal between the department and State Farm, though she said she had not made any calculations related to the impact of the revised proposed interim homeowner rate increase, 17%. Shaw said the department’s counsel gave her the figure, and that she agreed that it was an acceptable interim rate pending a full rate hearing that’s scheduled to begin in June.
She also noted that after the department further examines the company’s finances, if the approved interim rate is shown to be excessive, policyholders will be eligible for refunds, with interest, from State Farm.
Lara asked the company’s executives questions about its finances during an in-person meeting in late February, but he was not satisfied with their responses. He called for the public rate hearing, saying the company needed to further prove its case.
State Farm had a setback in trying to do so at the hearing this week. The judge disqualified the actuary the insurer hired to testify about justifying its requested rates because it turned out she was also under contract to the insurance department. Both the insurance department and Consumer Watchdog, the advocacy group that argued against granting State Farm’s rate request, raised objections about a possible conflict of interest.
The main arguments State Farm’s witnesses made about its financial situation mostly echoed previously disclosed information: State Farm said after the fires that it expected its surplus of $1.04 billion at the end of last year to decline by $400 million. An insurer’s surplus is its assets minus its liabilities, and is supposed to be a backup in case other sources of funds for claims are exhausted.
David Appel, an economist, testified that State Farm’s risk-based capital ratio of 150% — its amount of capital compared with its risk — is almost at a point where a regulator might need to intervene to help with its solvency. Appel said “the fact that the largest insurer of the largest state is almost at (regulatory action level) is extraordinary.”
Appel also reiterated what the company has been saying for a while: that AM Best, a credit rating agency, downgraded its credit rating last year, and that another agency, S&P, has placed State Farm on a credit watch. Because further downgrades could result in State Farm failing to meet the minimum requirements to insure homes with mortgages, Appel said it puts hundreds of thousands of State Farm customers with mortgages at risk of losing their insurer.
But William Pletcher, Consumer Watchdog’s lead attorney, said: “Policyholders are not insurance company investors. They’re not here to bail out insurance companies.” Pletcher also said in his closing argument that the company had not proven its need for an interim rate; that it instead argued that “it was too big to fail.”
Consumer Watchdog also argued that according to California’s voter-approved insurance law, Proposition 103, an insurer may be granted an interim rate only when it can prove its current rates are invalid. The group’s actuary, Ben Armstrong, testified that according to his calculations, the company had not proven its case — though State Farm’s attorneys pointed out that in some cases his calculations were consistent with theirs, and also that he made a couple of mistakes.
Last spring, State Farm raised homeowner premiums an average 20%, before it requested more increases over the summer. The full rate hearing for those requests are scheduled for June 1, the same day the interim rates are set to take effect.
State Farm and the insurance department did get Armstrong to acknowledge that the insurance company’s finances appear to be at risk. But he said that if State Farm gets the interim rate increase, another risk is that other insurance companies will also ask for interim rates, “driving unaffordability for California policyholders.”
In State Farm’s closing argument, attorney Katherine Wellington said if the company’s interim rate hikes are not approved “in this moment of crisis,” that would also be a risk for California policyholders.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.