A Florida Senate panel grills the insurer after banning it from the state

Senior Allstate executives have been forced to defend their request for a 43% rate rise in Florida to a state Senate panel.

Following new legislation introduced in February 2007, which increased the state’s reinsurance backstop – the Florida Hurricane Catastrophe Fund (FHCF) – the panel are querying why the rate rises are necessary.

Florida governor Charlie Crist’s new legislation doubled the capacity of the FHCF in an effort to lower homeowners’ premiums in the hurricane-exposed state.

It was intended to provide cheap reinsurance for the primary insurers operating in the state. The insurers were then expected to pass the savings on to their customers.

According to Reuters, Allstate officials said the rate request for Allstate Floridian was needed to shore up rates that were too low when compared to the state's hurricane risk, especially over the next few years.

"Balancing the need for affordable rates with the need for reliable coverage is no easy task," Allstate Floridian chief executive Joe Richardson told the panel during the first of two days of hearings.

"One of our primary concerns is to ensure that we have adequate resources to meet the promises we made to our customers."

“Balancing the need for affordable rates with the need for reliable coverage is no easy task

Allstate Floridian chief executive Joe Richardson

Lawmakers and state regulators contend Allstate and other insurers did not pass on savings accrued when the FHCF was expanded.

The two-day Senate hearing will take testimony from Allstate, Nationwide Mutual Insurance, Florida Farm Bureau Insurance, The Hartford and American Strategic Insurance Corp.

Despite dropping its premium rates by 14.2% last year – following the new legislation – Allstate resubmitted rates with increases of 43% in September 2007.

Allstate’s profits dropped 37% in the fourth quarter of 2007, largely as a result of catastrophe losses related to the California wildfires.

Since the active hurricanes seasons of 2004 – when four hurricanes hit Florida in succession – and 2005, the industry’s catastrophe models have been revised.

Near-term versions of the models now reflect a period of heightened hurricane activity and intensity.

Last year the Florida Commission rejected Risk Management Solutions’ near-term model in favour of its unrevised model. The unrevised model does not reflect the heightened hurricane risk.

“We are here today, as legislators, to make sure the industry keeps its promise and that those who break their promises be held accountable

Senator Jeff Atwater

The state’s hurricane risk outlook is therefore lower than that of many primary insurance companies.

This is one reason for the disagreement in rate rises. With the risk deemed to be higher by the near-term models, Allstate has been pricing the risk higher. The Commission disagrees with this assessment.

Allstate executives argued they were not required to use a state-approved model.

Speaking at the 2007 Monte Carlo Rendez-Vous de Septembre, RMS CEO Hemant Shah told Global Reinsurance that the Florida Commission’s decision to reject its revised model had been “a triumph of politics over reason”.

Homeowner insurance rates are increasingly on the political agenda in Florida. Charlie Crist promised to lower premium rates if he won the Florida election in 2005.

It was therefore of little surprise that one of his first acts as governor was to introduce new insurance legislation to boost the state’s hurricane fund.

Florida Commissioner Kevin McCarty has also got tough with insurers he considers to be charging too much in the state.

“Florida was a triumph of politics over reason

RMS CEO Hemant Shah

In January he announced he was suspending Allstate from doing business in the state due to its “blatant disregard” after the insurer had submitted objections to its subpoenas.

"In view of Allstate's ongoing, blatant disregard of our subpoenas, I have little choice but to take an action that will send a clear message about how seriously I am taking this issue," said McCarty. "Suspending their certificate of authority to write new business in our state should make my point.

McCarty abruptly halted the scheduled two-day hearing into the Allstate companies’ reinsurance programme, its relationships with risk modelling companies, insurance rating organisations and insurance trade associations.

Allstate was to have provided all appropriate company documents related to the hearing but instead sent 51 pages of objections to the subpoenas.

The company has since produced another 55,000 pages of evidence.

"It would appear at this point that the company is acting in good faith," said Florida Insurance Commissioner Kevin McCarty.

With the hearing now back on the insurer will be hoping to reach an agreement so it can continue to write business in Florida.

"For all the dollars it collects in premiums, what (the industry) provides its customers with is a piece of paper and a promise," said Senator Jeff Atwater, a Republican from North Palm Beach and chairman of the Select Senate Committee on Property Insurance and Accountability.

"We are here today, as legislators, to make sure the industry keeps its promise and that those who break their promises be held accountable."