By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/state-farm-insurance-hearing-20265652.php
Should California’s largest insurance company be allowed to raise prices for consumers to preserve its financial viability?
That question is at the heart of a highly unusual, multiday rate hearing in Oakland that kicked off on Tuesday, with consumer advocacy group Consumer Watchdog as the sole party advocating against a major rate increase, and State Farm and the California Department of Insurance in favor.
The judge has as yet made no determination, and testimony will continue into Wednesday and potentially through Thursday.
One important change: State Farm now requests to increase rates for homeowners by 17%. That’s just over half of the 30% it originally requested last June, and down from its prior request for 22%.
Insurance regulators endorsed the adjusted request, pending evidence to back it up.
“The department agrees with State Farm that this is an emergency situation,” Nikki McKennedy, assistant chief counsel for the department’s Rate Enforcement Bureau, testified at the hearing. “Nothing in this situation is normal. The normal rules do not apply. We’re on the Titanic, and we see the iceberg. Now is not the time to argue about where to put the deck chairs.”
However, the lowered request also reflects State Farm’s decision to continue with plans to non-renew thousands of customers in the state and its plans to seek money from its parent company.
Last summer, State Farm announced it would not renew approximately 30,000 homeowners policies throughout the state, but 11,000 of those nonrenewals were still pending as of last month.
When Insurance Commissioner Ricardo Lara gave State Farm conditional approval of its rate hike request in February, he asked the company to pause those nonrenewals for at least a year. But on Tuesday, company representatives said it still needed to drop those customers to protect its risk exposure. Some customers will still retain their insurance for at least a year due to mandatory nonrenewal moratoriums that go into effect after major wildfires.
If the 17% increase for homeowners is approved — alongside 5% for condo owners, 15% for renters and 38% for rental homes — State Farm General will seek an additional $400 million in funds from its national parent company, State Farm Mutual Automobile Insurance Co., said Katherine Wellington, a lawyer delivering State Farm General’s opening statement.
Lawyers for both State Farm General and the California Department of Insurance argued Tuesday that the 17% rate increase was necessary to safeguard the financial stability of State Farm General and the California homeowners market overall, where State Farm collects 20% of all premiums.
The first witness of the hearing, expert witness David Appel, testified on behalf of State Farm that poor profits over the past decade had left State Farm in a precarious financial position, especially in the wake of the Los Angeles wildfires.
Both Appel and Wellington focused heavily on State Farm General’s financial ratings. Last year, the agency A.M. Best downgraded State Farm to a B and S&P has indicated it could downgrade the insurer in the future. A significant downgrade could make State Farm General homeowners customers ineligible for mortgages backed by Fannie Mae and Freddie Mac.
“If State Farm Generals’s financial strength rating were downgraded, hundreds of thousands of consumers would lose their insurance,” Wellington said in opening statements.
But Consumer Watchdog, a consumer advocacy group arguing against the rate increase, said in opening statements that California homeowners should not be asked to pay to restore a company’s financial standing.
“Policyholders are not insurance company investors. They don’t pay premiums to boost a company’s surplus,” said William Pletcher, the group’s litigation director. “They’re not here to bail out an insurance company.”
The hearing was scheduled to start back up 10 a.m. Wednesday with Arpel’s cross examination. State Farm plans to call additional witnesses, while Consumer Watchdog will present evidence arguing the requested rate increases aren’t justified by California’s rate-setting formula.
Despite the presentation of evidence and testimony from experts, this week’s proceeding is not a full rate hearing. Even if the rate hike request is granted, regulators said they will hold a more in depth inquiry later. If they determine that the emergency rate hike they approved was too high, then the insurer will be ordered to refund policyholders with interest.