State Farm plans its largest rate cut;

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The insurer is seeking reductions of 20% for homeowners and 10.1% for drivers in California.

The Los Angeles Times

State Farm, California’s largest home and auto insurer, on Wednesday proposed a 20% rate reduction for its residential customers in the state amid a drive by outgoing Insurance Commissioner John Garamendi to press insurers into using strong industry profits to lower fees.

The rate decrease for State Farm‘s 1.4 million home insurance customers was nearly double the premium cut that the company had requested in September. The company also filed for a 10.1% rate reduction for its 3 million California automobile policyholders, compared with the 8.1% cut it sought in August.

State Farm‘s average home insurance customer, whose rates would drop in April, can expect about a $164 annual decline, depending on factors such as how long a customer has been with the company. The average State Farm driver, whose rates would drop in March, could expect a nearly $86 decline.

In all, customers can expect to see nearly $500 million in annual savings, the company’s largest rate cut in California since it wrote its first policy in 1928, Bloomington, Ill.-based State Farm Group said.

“We’re seeing the largest insurance company in this nation… reducing its homeowner insurance rates by over $230 million,” Garamendi said in San Francisco during a telephone news conference, days before assuming his new post as lieutenant governor. Garamendi has been pressuring insurers to lower what they charge for home and auto insurance, citing a reduction in claims.

State Farm, for instance, paid 37.6 cents in California homeowner claims for every dollar in premiums collected in 2005 compared to 88.9 cents per dollar in 2001, state figures show.

After State Farm filed for a 10.6% rate cut for homeowners and an 8.1% reduction for automobile policyholders last year, the company’s claims and profitability were analyzed, Garamendi said, and the state agency pushed for greater reductions.

“Through the process of analysis, we forced them to actually double what they wanted to do,” Garamendi said.

State Farm spokesman Bill Sirola said the company negotiated with the insurance department to come up with new rates. “This has been part of an ongoing pattern,” Sirola said. “We’re always looking to lower rates for policyholders.”

In 2005, State Farm cut its California automobile policy rates 4.2% and homeowner’s insurance rates 6.2%.

The Foundation for Taxpayer & Consumer Rights, which petitioned for a hearing on State Farm‘s initial proposal, was satisfied with the rate reduction even though it wasn’t the 30% cut that the Santa Monica-based consumer advocacy group had hoped for, litigation director Pamela Pressley said. “We felt it wasn’t sufficient,” she said of the initial 10.1% reduction. “We’re pleased that they almost doubled their original request.”

The push for rate reductions came last year after Garamendi, who noted that claims dropped while insurance profits did not, ordered State Farm, Allstate Corp., Farmers Insurance Group and Safeco Corp. to prove their rates were justified.

Since then, all but Northbrook, Ill.-based Allstate have lowered their rates. Seattle-based Safeco slashed rates by 20% for its 189,000 California residential customers and Los Angeles-based Farmers reduced rates by 12% to 15% for its 1.3 million customers.

The total reduction in home and automobile insurance for 2006 will be more than $1.6 billion, Garamendi said.

Allstate, the state’s third-largest insurer, wants to increase home insurance rates by 12.2%. The company said it was seeking the rate hike to build reserves for natural disaster claims, but that rates should remain competitive.

After companies file rate applications with the state Insurance Department, rates are negotiated.
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