Mass. AG Calls for 18% Cut in Home Insurance Rates Charged by FAIR Plan

October 12, 2007

Homeowners insurance rates for many in Massachusetts insured through the state’s secondary market insurer, the FAIR Plan, would drop 18 percent if Massachusetts Attorney General Martha Coakley gets her way.

Coakley’s office has intervened in the FAIR Plan rate setting proceeding currently before Insurance Commissioner Nonnie Burnes by recommending a statewide average premium decrease of 18 percent. This proposal includes a 29 percent decrease for residents in Cape Cod and surrounding islands.

Last year the FAIR Plan was granted a 12.4 percent statewide hike and 25 percent on the Cape.

This year’s recommendation from Coakley, if adopted, would effectively roll back last August’s 25 percent rate hike for coastal communities and provide a small additional decrease based on decreasing losses. Coakley has also opposed last year’s rate ruling in court.

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

The FAIR Plan, also known as the Massachusetts Property Insurance Underwriting Association, is run by the state’s insurance companies. It is required to provide homeowners insurance to consumers who cannot obtain insurance in the voluntary marketplace. The plan was designed by the Legislature to be an insurer of last resort and provide home insurance at reasonable rates but today it insures 170,000 homeowners, including close to 50,000 Cape and islands homeowners.

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

Coakley’s filing, a response to the industry’s proposal, suggests that the rates should dramatically decrease. Coakley’s team provided expert testimony that criticized the FAIR Plan’s calculations and raised questions about insurers’ use of so-called hurricane modeling, reinsurance costs and non-hurricane loss projections.

Coakley wants insurers to reveal more about their confidential hurricane models and reinsurance costs that significantly affect rates.

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

Coakley has also questioned the price that the FAIR Plan has paid for reinsurance. She maintained that some insurers refused to provide supporting materials to show why they paid $80 million for reinsurance coverage. She cited several members of the FAIR Plan, including Liberty Mutual, Chubb, and Travelers for alleged failure to provide the reinsurance information.

She said her office filed a motion late last week for sanctions against the FAIR Plan over the release of information about hurricane models and reinsurance purchases.

The attorney general also claims that the FAIR Plan used inflated loss projections and figured that non-hurricane losses were increasing. But Coakley says these non-hurricane losses are decreasing and that the FAIR Plan is profitable.

The overall average rate increase requested by the FAIR Plan includes 13.2 percent for Homeowners Multi-Peril Insurance and 8 percent for Dwelling Fire and Extended Coverage.

Included in the FAIR Plan’s proposal is a 25 percent rate increase for homeowners on Cape Cod and in Plymouth and New Bedford and 8.3 percent increase for those in the coastal community of Fall River.

It has recommended that rates for Commercial Fire and Allied Lines remain unchanged.

Last year’s rate hike rate was the first for the FAIR Plan since the Legislature amended the state law in 2004 to eliminate rate caps for the 13 largest share territories by allowing predicted hurricane losses and the cost of reinsurance to be factored into the rate.

The FAIR Plan says rate hikes are needed to keep up with large predicted hurricane losses and the high costs of reinsurance.

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