LOS ANGELES, July 29, 2024 /PRNewswire/ -- Consumer Watchdog is asking Insurance Commissioner Lara to hold a public hearing on State Farm's new request for a 30% increase in its homeowners insurance rates because the company wants to use the money to improve its general financial condition, far beyond what it needs to pay expected claims. 

The proposal amounts to a $5.2 billion bailout by policyholders over the next four years, according to Consumer Watchdog. 

"State Farm's request is unprecedented in the 36 years since voters passed Proposition 103," Consumer Watchdog said. "Under the law, an insurance company must open its books and prove that its financial condition warrants forcing policyholders to bankroll the company. And the company must show that it will repay policyholders. State Farm has done neither so far," said Carmen Balber executive director of Consumer Watchdog.

Download Consumer Watchdog's Petition to Intervene and Petition for Hearing in the rate increase proceeding at the Department of Insurance filed late Friday here and discovery requests here.

The Petition raises concerns that State Farm's California arm, a wholly-owned subsidiary, is sending profits out of state by overpaying the parent company for reinsurance and services. 

A hearing on the 30% rate increase is required when sought by the public under the 1988 insurance reform initiative Proposition 103.

According to the Petition:

"The additional $1.3 billion a year for at least four years, or at least $5.2 billion in total, [State Farm General] wants to collect from its California policyholders would be used to 're-capitalize' the company—in other words, to purportedly rescue the company from what State Farm describes as a deteriorating financial condition. However, State Farm has failed to adequately support its purported need for such an extraordinary bail-out by policyholders, especially in light of State Farm's parent company's $100+ billion surplus in recent years."

In its rate increase application to the Department, State Farm acknowledges that under the standard regulatory ratemaking formula that requires insurance companies to set rates based on reasonable projections of future losses, the company would be required to reduce its rates by at least 9.2%. Instead, State Farm is seeking a 30% rate increase claiming it needs "to protect its solvency."

However, the publicly available information reviewed by Consumer Watchdog's experts suggests that State Farm may have engineered its financial conditions to create the appearance of a need for a bailout by transferring profits out of the state in the form of "reinsurance" payments to its parent company, which is based in Illinois. 

Reinsurance, often referred to as insurance for insurance companies, is used to transfer some of the risk of future losses to the reinsurance company.

According to the Petition:

"Weighing against State Farm's claims [of financial distress] . . . there is evidence that State Farm General has transferred more than $600 million to the parent company in 2023 in the form of inflated payments for reinsurance. Based on past State Farm experience, it is likely that a significant portion of the excess premium charges and inflated underwriting profit that would result if the Application is granted will be transferred to the parent company in the form of profits resulting from inflated reinsurance charges."

The Petition raised additional concerns about State Farm's extraordinary request, noting: 

• Homeowners insurance policyholders in California would pay the vast majority of the rate increase, despite the fact that "it appears that much of the company's California losses in recent years came from commercial and liability policies, not homeowners. Between 2020 and 2023, State Farm had direct underwriting profits from homeowners insurance of $1.4 billion."
   
• State Farm's parent company has bailed out other subsidiaries with financial needs, so "why hasn't the parent company stepped in to assist its affiliate financially, as it did when SFMAIC's Texas affiliate writing homeowners insurance encountered financial trouble years ago?"
   
• From 2014 to 2023, State Farm paid reinsurance premiums of nearly $2.2 billion, but was only reimbursed $0.4 billion – or less than 20%. The vast majority of this was paid to State Farm's parent company. A reinsurance return that low is "a strong indication that the reinsuance agreement is much more favorable to the reinsurer [the parent company] than to the Applicant." Under present rules, insurance companies in California are not allowed to pass the cost of reinsurance through to policyholders. State Farm appears to be seeking to recoup reinsurance payments through future rates.
   
• Despite the massive rate increase, State Farm still "intends to decrease the number of policies written, mostly through nonrenewals, by more than 35% from 2023 to 2028." 
   
• State Farm has failed to disclose the details of significant financial arrangements under which it pays its parent company for administrative and other expenses. 
   
• State Farm's application does not offer a detailed plan to reimburse policyholders once its financial condition is restored, as the regulations require. 

 State Farm's application for a 30% increase comes just four months after a prior 20% ($471 million) increase in its home insurance rates took effect.

State Farm General is California's largest home insurance company, insuring approximately 20% of the homeowners insurance market, and its parent company, State Farm Mutual Automobile Insurance Company (SFMAIC), is the nation's largest insurance company by premium dollars, with a surplus of $134 billion at the end of 2023.

Background on Proposition 103

Voter-approved Proposition 103 requires that insurers open their books and prove they need to raise rates in a process subject to full transparency, in which consumer representatives have the right to review and challenge improper rates and practices.

Insurance companies must publicly disclose all the data necessary to support their rate requests. The Commissioner must then decide whether to approve or reject such rate applications before they take effect. Proposition 103 also requires the Commissioner to protect the solvency of the insurance companies when considering rate increases. 

According to the Consumer Federation of America, Prop 103 has saved California motorists over $154 billion since 1989.

Consumer Watchdog is a non-profit, non-partisan citizen organization founded in 1985. The organization has saved California consumers over $6 billion over the last 22 years by challenging excessive and unfair auto, home, business and medical malpractice rates.

For more information about Proposition 103 visit: https://consumerwatchdog.org/prop-103/.

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SOURCE Consumer Watchdog