State to grill Allstate on premiums;

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Hearings are ordered that could lead to refunds to homeowners. The company says its rates are fair.

Los Angeles Times

Nearly 1 million customers of Allstate Corp. appear to be paying too much for home insurance and may get partial refunds, California Insurance Commissioner Steve Poizner said Wednesday.

He ordered the insurance giant to face hearings this summer before an administrative law judge. If the judge and Poizner conclude that rates are excessive, the commissioner said he would seek refunds that could total millions of dollars.

“I am drawing a line in the sand,” Poizner said. “If I find that Allstate‘s rates are excessive, refunds will occur. I will take clear and decisive action to protect consumers.”

It’s much too soon to know how large individual refunds could be or when they might occur. This is the first time the state has sought such refunds, and experts foresee a lengthy court battle.

Wednesday’s action was the boldest move yet by Poizner, a Silicon Valley Republican who took office in January.

It may also inflame an already testy relationship between Poizner and Allstate. Two weeks ago, Allstate said that it would no longer issue new home policies in California and that it would continue to seek a 12.2% price increase for its existing customers.

The company says it needs the rate increase to build reserves against the risk of wildfires and fires caused by earthquakes.

Northbrook, Ill.-based Allstate called its rates fair.

“The facts are that Allstate‘s California homeowners insurance rates currently in place were reviewed and approved by the California Department of Insurance in 2003, and our policies are competitively priced,” spokesman Rich Halberg said in a statement.

He said the company looked forward to defending its rates in the hearing.

The company’s stance on rates is in stark contrast to pricing by its major competitors.

In recent months, market leader State Farm Mutual Automobile Insurance Co. slashed its premiums 20% and No. 2 Farmers Insurance Group cut its rates 18%. Many of Allstate‘s rivals now say they plan to expand their homeowner business in California, in part by wooing Allstate‘s customers.

The Department of Insurance estimates that Californians saved about $1 billion on their home insurance bills in the last year as part of the negotiated rate reductions.

Poizner said he was concerned that Allstate‘s rates were too high “given that other insurance companies that are significant competitors are dropping their rates.”

He noted that Allstate now paid only about 40 cents to settle claims for every dollar of premiums it received. That figure is “historically very low for any insurance company,” Poizner said.

From 1996 to 2005, Allstate paid an average of 56 cents in claims per dollar of premiums received, according to Department of Insurance statistics.

Consumer advocates hailed Poizner’s order against Allstate as an aggressive move to discipline a company that they say has not treated policyholders fairly in hurricane-prone areas. In addition to California, Allstate has stopped writing new homeowner policies in all or parts of 15 hurricane-prone states on the Gulf and Atlantic coasts.

“The fact that Poizner is taking a firm stand is good for California and, hopefully, will reverberate across the country,” said Amy Bach, executive director of San Francisco-based consumer advocacy group United Policyholders.

But industry lobbyists in Sacramento cautioned that the commissioner might be going too far. They questioned whether Poizner had the legal authority, under Proposition 103, a landmark insurance initiative approved by voters in 1988, to order refunds on rates that had been approved by state regulators.

“The commissioner has the authority to call hearings to determine if rates are excessive, inadequate or unfairly discriminatory,” said Sam Sorich, president of the Assn. of California Insurance Companies. “But it’s prospective. Nothing in Proposition 103 talks about refunding rates.”

Sorich, whose organization includes Allstate, predicted that the insurer would fight any eventual refund order in California’s courts “because there is no authority for the commissioner to make such an order.”

But Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica, contends that Proposition 103 puts Poizner on firm ground to call for premium refunds, if merited.

Proposition 103 is very clear that insurance companies can’t overcharge customers,” he said.

Heller, whose group has legal status to participate in the Allstate rate case at the Department of Insurance, estimates that the company’s rates for homeowner policies are 40% too high. Preliminary calculations indicate that each homeowner policyholder should get a refund of as much as $362, he said.

Other insurers “lowered their rates when they got out of whack,” Heller said. “Allstate left its rates out of whack and its policyholders are paying for it.”

Bucking the trend

Allstate is seeking an increase in premiums for California home insurance, while rivals have lowered their rates in the last year.

Allstate: +12.2%

Farmers: -18%

Hartford: -18%

Safeco: -20%

State Farm: -20%

USAA: -27%

Source: California Department of Insurance

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