Consumer Advocate Recommends Denial of Hartford’s Rate…Wait Till You Hear Why!

This post provides insights and opinions gleaned from yesterday’s “unique” rate hearing for Hartford Insurance of the Midwest. It sheds light on issues not discussed at the hearing or, perhaps, even technically relevant to the rate request. These discussions were brought to mind by the expressed need for the request and the rationale given by the Insurance Consumer Advocates office (ICA) for recommending the denial of the request.  It was also noteworthy that  there was no mention, in Steve Alexander’s presentation (ICA actuary) or elsewhere, of  MGA fees or agents’ commissions. 

First Some Housekeeping

Hartford has 49,287 Florida home policies and is requesting a 25.3% statewide average increase.  It’s policy count includes 17,292 in Broward, Palm Beach and Miami-Dade, but the increase is due to sinkhole losses in sinkhole alley. It started implementing a 24 percent average statewide hike last September and wants to apply this new increase beginning September 28.  If approved it would be a 50% increase since January 1, 2009.  This is it’s AARP program for Florida HO-3’s.

Lead interrogator, OIR actuary Bob Lee, corrected opening comments from Hartford’s heads of state with “clarifications” necessary, he said, for the public who may be watching via television; as follows:

1.) Stating that the indicated rate need was 55% but that such amount was not being requested to lessen any burden on policyholders, would not (does not, cannot) carry any weight in the approval process.

2.) Since the OIR does not “recommend” a profit factor for filings, requesting less (2.5%) than a factor perceived acceptable such as 3.5%, will not impact the chances of a favorable review.

3.) The fact that the company chose to use the public hurricane model for Cat Losses would not improve the chances of a favorable review.  A carrier is free to use any model it wishes and the public model is given no greater weight in the review process than those of other modeling firms.

Sinkholes–Plain & Simple

Both OIR and the ICA stated, without equivocation, Hartford’s request was driven by Sinkhole losses, “nothing more nothing less.” Hartford panelists did not object to that characterization.

It seems that Hartford’s AARP program has experienced monumental deterioration and it’s almost exclusively in one territory; territory 16, which comprises sinkhole alley, including almost all of Citrus County. It’s an increase in annual losses from around $2 million in 2006 to $13 million in 2010; a grand total of $30 million in just five years. Further, out of sixty statewide territories fifteen others are showing increases as well, though not as dramatic as territory 16.  Hartford received 482 sinkhole claims last year, an increase of 450%.  Projected forward, unabated and applied to a growing array of counties, losses like that are foreboding and far worse than other carriers.

One wonders if Hartford’s sinkhole burden is more acute because of its AARP “guaranteed renewal” arrangement. It can increase rates, but…it must stay on all the policies it has unfortunately written in sinkhole alley. So, while other carriers were avoiding sinkhole coverage via non-renewals, sending the business to Citizens instead, Hartford was stuck.

In addition to increasing its rates, Hartford will stem the sinkhole tide by removing sinkhole activity coverage from its policies. Previously, and inexplicably, (at least to yours truly), the company automatically included sinkhole activity coverage on its HO-3’s–perhaps also an AARP engendered action.

Once sinkhole is removed, Hartford will provide policyholders notice of the opportunity to buy it back with “steep” discounts for those who choose not to do so. And, in what’s becoming a more and more popular kicker, those who choose to pay more for “activity” coverage will be subject to an inspection prior to coverage being extended. It may also be an AARP tributary that, unlike other carriers, Hartford will pay the full cost of the inspection.

MGA & Agents; Fee’s & Commissions

Conspicuous by its absence was any mention of MGA fee’s or percentages. Of course, Hartford doesn’t utilize the MGA system. Most other carriers must endure the implication that they have unreasonably/secretly siphoned profits/surplus to investors/officers.  Comparisons of expenses as a dollar amount and as a percentage of premium are made with other states.  Why are Florida expenses based on percentages and why do our companies and agents receive so much more for relatively the same work?  The MGA system is the culprit and thus, in the minds of many, including consumer groups and the media, it is the reason for double digit rate requests after five years of no storms.

Hartford’s hearing is testament that such is not the case. It’s rate need was 55% and it was requesting an increase of 25.3%; both in line with the rest of the industry. But, Hartford doesn’t have an MGA.  If MGA’s are the problem, then why are companies that don’t use MGA’s also requesting rate increases of similar amounts for similar reasons?  How could MGA fee’s be cost drivers as some allege?  First, they’re based on a percentage of premium.  If the premium goes down due to lower costs, the MGA fee goes down, too.  But, if the MGA fee was flat, the premium couldn’t go down below that amount–that’s a cost driver! Besides, the work to process business in Florida, by an MGA or anybody, is considerably more, and; our costs are considerably higher than other states.

The ICA also recommended that Hartford’s rate request be “denied” and resubmitted to reflect losses in sinkhole alley rather than subsidizing those in sinkhole alley by averaging the increase around the state.

To its credit Hartford capped the indicated increase in its territory 16 at 10% letting others, including those on the coast, pick up the shortfall. “I see no reason why people in southeast Florida should subsidize sinkhole losses in Pasco County”, Alexander said, or words to that effect.

Say what?

Okay, I get it. No subsidies for Sinkhole Alley, for this company.

But…by the same token, why should Pasco subsidize wind exposure in Dade, Broward and Palm Beach?  Why should someone in Lake County pay assessments to subsidize those with vacation homes in Key West?  I don’t recall any arguments against subsidies when Citizens glide path increase was limited to 5.4% because decreases were capped at 10%.  What’s going on here?

It may come as no surprise that I agree with the ICA in its opposition to subsidies. I don’t understand, however, why such opposition flows only one way and applies only to some perils and not others.

Do you?

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