Massachusetts AG Recommends A Major Decrease In Homeowner Insurance Rates

October 09, 2007 -- BOSTON - Friday, Massachusetts Attorney General Martha Coakley’s Office made a filing in the 2007 FAIR Plan rate setting proceeding, currently before the Division of Insurance, recommending a statewide average premium decrease of 18% for Massachusetts homeowners in the FAIR Plan. This proposal includes a 29% decrease for residents in Cape Cod and surrounding islands. The recommendation, if adopted, would effectively roll back last Augusts’ unprecedented and unsupported 25% rate hike for coastal communities and provide a small additional decrease based on decreasing losses.

“Insurance companies cannot be allowed to take advantage of ratepayers who have no other choice but to buy FAIR Plan homeowners insurance” said Attorney General Martha Coakley. “The FAIR Plan’s rate calculations are grossly inflated and should not be approved by the Commissioner.”

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The FAIR Plan, run by the state's insurance companies, is required to provide homeowner insurance to consumers who cannot obtain insurance in the open marketplace. The plan covers 170,000 homeowners, including close to 50,000 Cape and islands homeowners. The Plan was designed by the Legislature to provide home insurance at reasonable rates.

In the current rate proceeding, the FAIR Plan is requesting a 25% rate hike for Cape Cod residents, the second in two years, and an overall 13.8% increase throughout the Commonwealth. It is also requesting 25% rate hikes for FAIR Plan customers in various Plymouth county communities, including Bridgewater, Marshfield, Wareham, Middleborough, and Plymouth.

The filing, a response to the industry’s proposal, suggests that the rates should dramatically decrease. The Attorney General provided expert testimony that criticizes the FAIR Plan’s rate calculations, and raise the following issues:

* Black Box Hurricane Models - The insurers relied heavily in their rate request on confidential “hurricane models” that purport to predict the likelihood of future catastrophic storms. However, the insurers failed to provide key specifics regarding these models, and did not show that they were calibrated for Massachusetts conditions.

* Overpriced Reinsurance - A major portion of the proposed rate hike comes from very costly reinsurance purchases made by the FAIR Plan. The insurers refused to provide supporting materials to show why they paid $80 Million for limited reinsurance coverage, or to demonstrate what the costs were for reinsurance in the open competitive marketplace. Several members of the FAIR Plan, including Liberty Mutual, Chubb, and Travelers failed to provide key requested reinsurance information in discovery.

* Inflated Loss Projections - The FAIR Plan used inflated loss projections in determining its rate proposal, opining that non-hurricane losses were increasing when in fact they are decreasing. The FAIR Plan appears on track to have another record breaking profitable year (the FAIR Plan’s profit over the last three fiscal years is over $100 million). However, the insurers continue to seek higher rates based on inflated future loss estimates.

In the filing, the Attorney General’s Office made necessary adjustments to the FAIR Plan’s calculations to make her rate recommendation. The Commissioner of Insurance has a choice to approve or disapprove the FAIR Plan rate filing; if she disapproves the filing, she may recommend the FAIR Plan file new rates based on the Attorney General’s proposal.

The Attorney General’s Office also filed a motion late last week for sanctions against the FAIR Plan relating to the insurers’ failure to produce key information about their hurricane models and reinsurance purchases. The models and reinsurance comprise a significant portion of the proposed rates, and the FAIR Plan has refused to provide key information on these issues. Earlier this year, the Commissioner of Insurance ordered the companies to produce the data after the Attorney General filed a motion to compel, but they have failed to do so.

The FAIR Plan Litigation is handled by Attorney General Martha Coakley’s Insurance and Financial Services Division.

Source: Massachusetts Attorney General