Mass. Fair Plan Rate Case Drags On with Parties Far Apart

January 9, 2006

Hearings to decide on rates for the homeowners insurance residual market in Massachusetts have been going on since November and are likely to continue for several more months, according to officials.

The three major parties – the residual market insurer known as the Fair Plan, the State Rating Bureau and the Attorney General—have submitted their bids but cross examinations and rebuttals are expected to last for weeks if not months.

Their recommendations range from no increase to a high of 12.9 percent statewide, and from a low 1.2 percent to a 25 percent increase on coastal Cape Cod.

In past years, rates for the Massachusetts residual market, the Fair Plan, have been a matter settled among parties without lengthy proceedings. But that’s not been the case this time around, as the Fair Plan’s emergence as a top writer of coastal properties in the state and differences over how to estimate potential future losses from hurricanes have gotten in the way of agreement.

The Fair Plan, or the Massachusetts Property Insurance Underwriting Association, provides insurance for homeowners who cannot obtain property insurance in the voluntary market. Originally the insurer served primarily urban residents, however in recent years more and more coastal residents have ended up insured with the plan as voluntary insurers cut back in the face of hurricane threats and reinsurance costs.

On coastal Cape Cod, the Fair Plan market share has ballooned from just four percent in 2000 to more than 28 percent today. Statewide, the Fair Plan writes about 11 percent of risks, or some 150,000 policies.

Last September, the FAIR Plan filed a request for a 12.9 percent increase statewide. That included a 25 percent increase for coastal Cape Cod.

That was the first time the Fair Plan has filed for rate adjustments under a new law permitting it to request rates that exceed certain caps. The residual market property insurer voluntarily “tempered” its rate request, exercising restraint under the new law that lifts caps on how much of an increase it can seek, according to John K. Golembeski, president of the Fair Plan.

“Indications are that we could have gone for a higher amount however we indicated we would do this gradually and have tempered our request because of those commitments,” Golembeski told Insurance Journal last fall.

But Golembeski’s organization didn’t temper its request enough, according to the State Rating Bureau arm of the Division of Insurance and the office of Attorney General Tom Reilly.

Overall, AG Reilly is recommending no rate increase for homeowners statewide in 2006. Reilly is seeking reductions, ranging from 2.1 to 14.2 percent in 140 communities, including most urban areas of the state. He is also proposing a slight rate increase — 1.2 percent — for homeowners on Cape Cod, where the risk of coastal storm damage is a factor. AG Reilly’s recommendation for Cape Cod is significantly lower than the 25 percent increase proposed by the industry.

“Fair Plan customers are among the most vulnerable in the state and should not have to pay excessive rates,” AG Reilly said.

The State Rating Bureau, meanwhile, has come in somewhere in the middle, recommending a statewide increase of about 9.1 percent, which is about 3.8 points lower than the Fair Plan’s own recommendation and a “reasonable” recommendation, according to Kevin Beagan, SRB director. For Cape Cod, the SRB’s recommendation is a hike of 19.4 percent, along with some adjustments depending on coastal versus non-coastal properties.

A major difference among the factions has to do with how to estimate future property damage from hurricanes. The FAIR Plan averaged the estimates of two hurricane forecasting models, one by Risk Management Solutions (RMS) of California and another by AIR Worldwide of Massachusetts. The SRB and the AG, however, use just the AIR model.

After hearings are completed, Commissioner Julianne Bowler will have to make a final decision, according to Beagan.

A Fair Plan request to have any new rates applied retroactively has already been rejected by the regulatory hearing officer, so any final decision will only affect future rates, Beagan noted.

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