Insurer Group Debates Florida Regulator Over 'Price Controls'

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WASHINGTON September 20 (BestWire) — Florida's personal-lines insurers operate under a "de facto" prior-approval system that doesn't deliver the pricing freedom promised by either of the competitive rating regulatory regimes the state has employed in recent years, an industry trade group claims in a letter to a key U.S. House subcommittee chairman.

Addressed to Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, the letter from the Property Casualty Insurers Association of America argues that the regulatory controls retained by the state under both its "file and use" and "use and file" options have made it necessary, in practice, for homeowners insurers to await approval before they are able to adjust their rates.

Greg Heidrich, PCI's senior vice president for policy development and research, wrote the letter in response to written and oral testimony offered to Baker's subcommittee by Florida Insurance Commissioner Kevin McCarty. In his testimony, McCarty disputed a frequent contention by insurance trade groups that state rate regulation should be characterized as "price controls."

"The term implies heavy-handed control by insurance regulators over what an insurer can charge," McCarty told a subcommittee hearing on stabilizing insurance markets for coastal consumers. "In actuality, insurance companies, not regulators, develop the rates and rating systems in 49 of the 50 states."

McCarty also pointed out that Florida's current reinsurance capacity crunch — coming after the state suffered $38 billion of insured damage from eight hurricanes over two years — has prompted the pullout of a number of surplus lines insurers, which don't submit to rate regulation.

But while conceding that insurers ultimately determine what prices they deem to be acceptable for the coverage they offer, Heidrich argued that "to assert that regulation and price controls do not have much impact.…is to see a world different from what insurers actually experience."

According to Heidrich, even in "use and file" and "file and use" states, insurers' ability to adjust their rates to respond quickly to changing market conditions may be limited. In Florida, the Office of Insurance Regulation may extend its rate review period under the "file and use" option by requesting an insurer waive the 90-day deadline for the commissioner to make a decision, Heidrich said. Conversely, the "use and file" system, which permits insurers to implement rate changes prior to receiving regulatory approval, presents insurers with the prospect of "regurgitating" premiums that a regulator may later determine were excessive, he said.

"Pricing catastrophe risk is very complex and requires a regulatory system that recognizes the volatility of the exposure and the need to build capital over time to pay the claims arising from a catastrophe," Heidrich wrote.

He praised the state's recent enactment of a "flex-rating" option as a step toward addressing this challenge, but he noted that it limits rate fluctuations over any 12-month period to no more than 5% statewide or 10% within any given region, and that it requires that the insurance department first to certify a market as "competitive" before the option may be exercised.

In an e-mail to BestWire, McCarty responded that the rates currently charged by insurers are those the companies' actuaries have demonstrated in sworn and certified rate filings to be appropriate for the risks undertaken.

"Although the quality of analysis and data varies from insurer to insurer, we do not believe that insurers submit false data, and therefore would not expect to find an approved rate that is inadequate, excessive, or unfairly discriminatory," McCarty said.

McCarty also asserted there is no evidence to support the claim that insurers haven't received timely and adequate rate decisions since the strike of Hurricane Charley on southwestern Florida in August 2004.

"We further believe that if Floridians are compelled to purchase a product, as federal law compels them to purchase insurance to qualify for federally backed mortgages, than they deserve reasonable oversight of the pricing and delivery of that product," McCarty said.
(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com) BN-NJ-09-20-2006 1553 ET #
 
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