California’s third-biggest home insurer cites fear of natural disasters

Sacramento Bee (California)

Allstate Corp., California’s third-largest homeowners insurance company, will stop writing new policies this summer, saying it fears the threat of costly natural disasters.

The decision, announced Thursday, emerged after the carrier broke ranks last summer with other major insurers and sought a 12.2 percent rate increase for its 900,000 policyholders in California. Allstate is preparing to argue for the increase before the Department of Insurance in September.

Consumer advocates blasted Allstate, accusing it of trying to pressure the state to approve the proposed rate increase.

“Allstate is issuing this decision to leave in part to bully the regulators and lawmakers into letting them continue to gouge their customers,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Their threat won’t get them much. I don’t think Californians will miss them.”

Allstate‘s exit had been rumored for months and follows similar moves by the Illinois-based insurer from other state markets.

Insurance Commissioner Steve Poizner called the move “a shortsighted business decision” and ordered Allstate to show it is not overcharging California consumers.

“Other companies.. have reduced insurance rates for California customers by more than $1 billion, in direct contradiction to Allstate‘s action,” Poizner said in a statement.

An Allstate official defended the decision. “California is one of the most natural disaster-prone states in the country,” said Rich Halberg, an Allstate spokesman in Sacramento. “The responsible thing to do is to manage overall risk.”

Current Allstate homeowners insurance customers will not be affected by Thursday’s announcement. The company has worked out a deal for Allstate agents to refer new customers to an independent carrier, Pacific Specialty Insurance Co.

With more than 100 homeowners insurance companies doing business in the state, consumers should have little trouble getting a new policy, industry officials said. In terms of market share, Allstate carried 14.1 percent of California homeowners in 2005, the latest year for which figures were available. State Farm led with 22.1 percent of the market, and Farmers had 16.3 percent.

“I don’t think this (decision) is going to create a serious market disruption,” said Sam Sorich, president of the Association of California Insurance Companies. “The market continues to be vibrant and competitive.”

Several of the state’s largest homeowners carriers, including State Farm and Farmers, have enacted double-digit rate cuts for thousands of customers. State Farm, the No. 1 insurer, reduced rates by an average 20 percent this year.

Last year, then-Insurance Commissioner John Garamendi prodded major carriers to lower premiums, accusing them of pocketing too much revenue. An Insurance Department study reported the top 20 insurers, including Allstate, paid less than 50 cents on claims for every $1 dollar in premiums in 2004 and 2005.

Heller’s group (FTCR) has challenged Allstate‘s proposed increase and urged Poizner to force the company to reduce rates by 40 percent.

Halberg said the rate request was unrelated to the rate issue. Allstate officials said the insurer could be one major natural disaster away from suffering steep financial losses.

In September, Richard H. Barge III, the company’s California region vice president, said it would be a “poor gamble to continue to hope for good fortune to protect the state from catastrophes.”

Barge said the insurer is accountable for up to $800 million in potential earthquake claims and faces rising catastrophe reinsurance costs. The Southern California wildfires in 2003 cost the company about $300 million.

During the first three months of 2007, Allstate wrote 11,000 new homeowners policies in California, down from 16,000 for the same period last year.

Allstate has taken similar steps in other states, especially those in catastrophe-prone coastal regions. It has stopped writing new homeowners policies in Connecticut, Delaware, Florida, New Jersey and parts of New York.

In California, the last major company to stop taking new homeowners insurance customers was State Farm in 2002. The company cited a risk in toxic mold claims. The company ended the ban a year later.