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Allstate's Florida insurers grilled on rate hikes

By Julie Patel, Sun-Sentinel

July 20, 2011

Allstate's Castle Key insurance companies fielded questions from regulators and a consumer advocate Tuesday on their proposed 31 percent and 36 percent average statewide rate hikes.

Combined, the Castle Key companies are the third largest private home insurers in the state. Castle Key Insurance had 138,862 policies statewide at the end of last year, including 31,750 in Broward, Palm Beach and Miami-Dade counties. Castle Key Indemnity had 125,562 policies, including 21,050 policies in South Florida.

The Insurance Consumer Advocate agreed with the statewide average increase recommended for the Indemnity company and recommended a smaller increase, 24 percent, for the Insurance company.

Individual policyholders' premiums can change by more or less than the average statewide rate change that regulators approve. The average increase by county that Castle Key seeks ranges from 7 percent to 68 percent, noted Bob Lee, an actuary for the Office of Insurance Regulation.

The Office approved statewide average rate hikes of 19 percent and 18 percent for the companies last year.

Castle Key officials said the companies need the rate hikes this year because costs of reinsurance, or insurance for insurers, are rising and the companies' premiums aren't keep pace with its claims-related costs, especially on newer policies.

"Our surplus level has been shrinking steadily over the past several years despite there being no hurricanes," said Bonnie Gill, a vice president for the companies.

Gill said the companies also need the increase because state lawmakers reduced how much reinsurance coverage is available from the Florida Hurricane Catastrophe Fund and increased its cost.

The companies were required to add 100,000 policies as part of an agreement it struck with the state in 2008. But since it doesn't plan to sell many new policies this year and next, the companies used data on losses from a longer time frame, when it sold fewer policies, to calculate rates. "That means the loss pressure from the new policies did not dominate our trend selection and was not the major driver of this rate request," Castle Key Spokesman Justin Herndon wrote in an email.

Steve Alexander from the Insurance Consumer Advocate's office recommended:

  • No "contingency" fees. These fees are collected in case actual costs exceed projected costs. Alexander said the company didn't explore other ways of making up the potential difference, if it even materializes, and there is already another part of the rating filing that acts like a contingency factor that's related to the company's investment income.
  • Eliminating interest rate charges on potential debt. Alexander said the company has no outstanding debt so the interest rate it wants to charge for potentially borrowing $56 million is based on the companies' "speculation of what the debt might be in the future without any real support."

A company representative said the debt projection is based on what the parent company borrows and allocates to subsidiaries since borrowing the money benefits all its companies. Lee noted the company based the number on historical debt levels.

A slightly higher profit margin: 10 percent instead of the 9 percent the company requested. Alexander said the company's 2 percent projected risk of folding comes from rating agency A.M. Best. He said it is too low because it's based on potentially receiving financial support from its parent company if it runs out of money to pay claims.

A smaller amount for overhead expenses: nearly 7 percent instead of the nearly 9 percent requested. Overhead expenses included costs of office space, advertising costs and agent commissions. "Overhead expenses should be based on actual Florida experience, not on the Allstate Group's experience, which is what the company did." Alexander said.

Lee questioned the company about its use of a new hurricane risk predication method that projects higher damages and is results in "one of the more material impacts" included in the rate change.

Shantelle Thomas, an actuary for Castle Key, said the companies rely on the model to help calculate rates: "We believe the new model is the best model to date."

Lee said it's important to remember that "you're not deal with actual hurricane losses...You're dealing with model software that simulates what might happen."

He noted sinkhole losses seem to be decreasing but the company expects to continue spending more money on claims-related expenses. OIR General Counsel Belinda Miller asked if the company is doing anything besides asking for a rate increase to lower its expenses.

Gill said the company hasn't decided all that it will do but it's already reinspecting homes and revoking hurricane-proofing discounts for those that don't qualify.

State law requires the Office of Insurance Regulation to hold rate hearings for rate hikes that exceed 15 percent and are based partly on data from a computer model. Regulators have until late August to reject the increase, approve it, or approve a smaller increase.

Consumers interested in weighing in can send comments to ratehearings@floir.com with "Castle Key" in the subject line.