As rumors and speculation swirled about whether Farmers Insurance is planning to completely withdraw from the Texas homeowners market, the Texas Department of Insurance (TDI) proposed a resolution to its dispute with Farmers over the company’s business practices.
Noting it has received numerous calls from Farmers agents indicating that the company is preparing to pull out of the state’s homeowner’s market in October, TDI asserted that the settlement offer would bring Farmers into compliance with the law and allow them to stay in the Texas market.
“Our proposal to Farmers represents a good faith effort to find a resolution and bring Farmers into compliance with Texas law,” said Karina Casari, TDI executive deputy commissioner. “The Texas Department of Insurance proposal addresses the unfair and illegal practices committed by Farmers while giving Farmers a fair opportunity to work through this problem. Our goal is to have Farmers stay in the market and be in compliance with the law.”
The TDI proposal to Farmers Insurance consists of the following 4 points:
• The department is willing to consider a combined settlement for both actions that includes restitution for policyholders and a substantive change to Farmers rate-making assumptions based on sound actuarial principles.
• The department is willing to waive the penalties it has proposed in the enforcement action if Farmers accepts the department’s combined proposal by October 1, 2002 and if Farmers agrees not to seek back commissions from the agents on the overcharges.
• The department is willing to resolve the cease and desist order, separately if necessary, through prospective rate-making changes.
• The department is willing to expedite form approvals for enhanced coverage similar to other approved national policy forms in combination with a rate reduction for the Fire Insurance Exchange. Farmers Insurance Exchange’s current rate structure is probably sufficient to provide adequate premium for expected losses under a more enhanced policy.
“Rumors, if true, that Farmers Insurance may be abandoning their loyal policyholders and their sales force is disappointing,” said Robert Black, TDI public information director. “From the very moment we ordered them to cease and desist from unfairly and illegally overcharging their customers, Farmers Insurance has refused to acknowledge the impact their actions have had on their customers and agents. Farmers should take responsibility for their actions and make restitution to the policyholders they have overcharged.”
In August, the Texas Department of Insurance issued a cease and desist order against Farmers Insurance alleging the following unfair and illegal acts:
• Failure to disclose to policyholders that its homeowners rates include an “unfunded catastrophe load” that subsidizes Farmers´ rate shortfalls in other states where natural disasters occurred.
• Calculating premiums throughout the state with the same multiplier to reflect the difference in coverage between the HO-B and the HO-A, even though mold and water damage claims paid under the HO-B vary widely from one geographic area of Texas to another.
• Switching policyholders to Fire Insurance Exchange without disclosing premium increases resulting from the switch.
• Using data that primarily reflects claims under the standard Texas HO-B “replacement cost” homeowners policy that Farmers no longer issues. The HO-A is an “actual cash value” policy unless a customer adds Farmers´ replacement cost endorsement, for an additional premium.
• Incorporating an “unfunded catastrophe load” into its rates.
• Using excessive trend factors, resulting in rates higher than justified by Farmer´s foreseeable claim experience under the HO-A policy.
• Using an excessive target profit. Farmers Insurance Exchange and Fire Insurance Exchange charge rates with a target after-tax return on net worth of more than 25 percent, including a “management fee” paid to Farmers Group Inc. By comparison, homeowners benchmark rates approved by the Commissioner for use by rate-regulated companies envision a return of 11.5 percent to 12.5 percent.
• Failing to consistently provide credit-based discount indicated by Farmers own date for policyholders in 15 of the companies 26 credit scoring categories.
• Failing to consistently provide age of home discounts.
“The State of Texas expects companies to be responsible, ethical and law-abiding corporate citizens and to treat Texans fairly. The Texas Department of Insurance is asking nothing more of Farmers Insurance or any other insurance company doing business in Texas,” added Black. “It is a shame that Farmers Insurance may be willing to sacrifice their policyholders and their agents when all we have asked them to do is comply with the law.”
According to A.M. Best, a Farmers spokesperson said the company has made no decision to pull out of the state. She added that Farmers is in discussions with the department and is trying come up with a solution that is acceptable to the company and the state.
Farmers has previously stated that it would stop writing new and replacement policies after Oct. 31 if an agreement with the state over the company’s pricing policies is not reached.
Topics Texas Agribusiness Homeowners
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