The Louisiana Department of Insurance on Friday rejected a request by State Farm Fire & Casualty Co., the state’s largest insurer, to increase homeowners rates by an average of 16.6 percent statewide.
“This would have been the fifth year in a row that State Farm has asked for double-digit rate increases, and the last four (years) received 8 percent to 9 percent increases each year,” Insurance Commissioner Jim Donelon said.
Meanwhile, the companies that insure the remaining 70-plus percent of Louisiana’s homeowners only took 2.5 percent rate increases, Donelon said.
State Farm’s new rates would have affected 305,099 policyholders, roughly 28 percent of the state’s homeowners, and generated $71.3 million.
Donelon said the rates were not “actuarially justified.”
There were a number of variables that factored into the decision, Donelon said. A lack of actuarial support prompted concerns about the size of the profit State Farm had built into the rates.
State Farm’s trend selections — projected losses from fire, burglary and hurricanes, and so forth — didn’t fall in line with actuarial data, and that raised additional questions, Donelon said.
Actuaries try to predict what policies will cost in the future, basing their calculations on things like the age of the home, the type of construction, the marketshare in the areas vulnerable to hurricanes and those in north Louisiana; the history and strength of hurricanes that hit an area; and the cost of reinsurance, the insurance that insurers buy, Donelon said. The predictions also include overhead expenses, profit and salaries.
State Farm spokesman Gary Stephenson said the company was disappointed by the decision.
“There is a real rate need there,” Stephenson said. “It’s obvious the kinds of losses that are occurring in the state, primarily due to coastal storms.”
State Farm will take another look at the rate filing and try to come up with some sort of solution that will allow the company to continue providing the kind of coverage it wants to while meeting its customers’ needs and maintaining a strong financial position, he said.
Donelon said the cost of reinsurance was a factor in the department’s decision.
The department doesn’t know if State Farm’s reinsurance was provided in-house, as it has been in the past, or it bought reinsurance from an unrelated company, Donelon said.
“And we want to know that,” he said.
The department gives greater credibility to reinsurance costs from unrelated companies, Donelon said. Some big companies feel they can be more efficient by providing their own reinsurance.
The decision came a day after Donelon announced he had denied State Farm’s request for permission to raise storm deductibles to as much as 4 percent for all of its customers in some coastal parishes.
The rate increase that was rejected Friday would have varied by area, with coastal parishes seeing the largest increases, Donelon said.
However, this rate request, like State Farm’s four previous filings, Donelon said, included “significant discounts” for long-term, claims-free homeowners’ policyholders and those who also buy life and auto insurance from State Farm.
“The impact of those significant rate increases was largely on new business, which in coastal areas they’re not writing much of, virtually none of,” Donelon said.
So although State Farm got the previous rate increases and the increases were higher in coastal areas, the higher rates affected a relatively few number of people, Donelon said.
Donelon said the decision on the rate increase was not affected by State Farm’s effort to implement a regional deductible.
With a regional deductible, State Farm would have been able to increase hurricane deductibles to as much as 4 percent for all of its customers in some parishes. State law requires regional deductible requests include a business plan showing how the new deductible will help State Farm write new business in those parishes.
But State Farm didn’t include that information in its filing, Donelon said. And State Farm made no reference to or use of a regional deductible in its filing to raise rates.
State Farm was the first and only company to ask for the regional deductible, Donelon said.
The Insurance Department said it could not release the parishes State Farm would have included in the regional deductible because the information is proprietary.
Stephenson also described Donelon’s decision on the regional deductible as disappointing.
“It’s all balanced. It works together,” Stephenson said. “So we’ll have to look at this ruling and just determine what that does to our rate needs, what that does to our ability to write or not write, and our business plan and marketing plan in southern Louisiana.”