State demand could lead to homeowner policy refunds
Sacramento Bee (California)
Calling Allstate Corp. an outlier among leading California insurers, Insurance Commissioner Steve Poizner ordered it on Wednesday to justify the homeowners rates charged to thousands of policyholders across the state.
The demand sets the stage for a historic move by Poizner to compel the state’s largest homeowners insurance carrier to issue refunds and lower rates for Allstate‘s 900,000 California customers in the coming months.
The commissioner questioned Allstate‘s request for a 12.2 percent rate increase at a time when major competitors have lowered premiums by about $1 billion. State Farm Insurance Co., California’s largest insurer, reduced rates an average of 20 percent while the No. 2 insurer, Farmers Insurance Group, cut premiums by 18 percent.
“We do have reasons to believe their rates are excessive,” Poizner said during a telephone news conference. “The potential refunds could be very significant.”
An Allstate spokesman defended the company’s rate proposal, citing the potential financial risks posed by natural disasters such as earthquakes and wildfires.
“We have not had a rate increase in more than four years,” said Pete Moraga of Allstate. “While other companies raised their rates, we kept ours the same. Our rates are competitive.”
Poizner’s order comes two weeks after the Illinois-based insurer announced plans to stop writing new homeowner policies this summer. Farmers and other insurers are poised to expand in California and pursue Allstate‘s business.
Consumer advocates contend that the Allstate withdrawal is aimed at pressuring Poizner to approve higher premiums. They vow to lobby for steep cuts.
“The premiums they were charging may have been appropriate four years ago. Their costs went substantially down. They should have lowered (rates),” said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “They need to return money to the customers they overcharged.”
To move quickly, Poizner plans to start the Allstate review in July and issue a ruling in late summer or fall. Any refunds, which would be retroactive to Wednesday, would be the first ever ordered by a California insurance commissioner.
Poizner declined to estimate a potential rebate amount. Heller’s group puts the figure at $900,000 a day for policyholders, or $1 for each Allstate customer going back to the date of the commissioner’s order.
Poizner said an initial look at Allstate‘s financial numbers makes a case that the company’s rates are too high. He cited Allstate‘s claim payments compared with the premiums paid by policyholders, known as loss ratios.
In 2004, Allstate paid out 25 cents for every $1 in premiums collected and 33.6 cents per dollar in 2005, according to Department of Insurance documents. Poizner said the number now is in the low 40s. Historically, claim payments have been in the 60- to 80-cent range.
Poizner said his attorneys are ready for any legal challenge. “I expect there may be some push back.”
Indeed, the insurance industry is prepared to join Allstate in court if Poizner orders a refund.
Sam Sorich, president of the Association of California Insurance Companies, questioned Poizner’s power to require insurers to return money collected from premiums already approved by the state.
“We believe that authority does not exist in the insurance code,” Sorich said. “I’m sure the company would oppose that.”
Allstate‘s rate proposal centers on a need to protect the company financially against costly natural disasters. Officials said the company faces up to $800 million in potential earthquake claims and rising catastrophe reinsurance costs.
This threat has prompted the company to stop issuing new homeowners policies in California starting July 1. Allstate has taken similar steps in catastrophe-prone coastal states, including Florida, New Jersey and Delaware.
The Bee’s Gilbert Chan can be reached at (916) 321-1045 or [email protected]