Mass. AG Wants to Put Brakes on ‘Excessive’ Homeowners Insurance Rate

November 18, 2011

Massachusetts Attorney General Martha Coakley is urging the State Rating Board to hold a hearing to scrutinize the data insurers use to set homeowners insurance rates in her state.

The Attorney General’s office says it is estimating possible overcharges of half a billion dollars due to what it calls “untested hurricane models” used in determining premiums.

“Untested and unsupported forecast models should not be used to justify rates that are excessive,” said Coakley in a letter sent to the State Rating Board.

“Hurricane models have a significant impact on the premiums paid by all Massachusetts homeowners who could have paid millions in excessive rates as a result. All insurers should be required to demonstrate that these models produce accurate estimates that are appropriate for Massachusetts.”

Homeowners Overcharged?

She says that between 2004 and 2010, rates increased based on the insurers’ hurricane predictions and caused consumers to pay an increase of $2.2 billion, half a billion of which could be overcharges, in her estimates. Massachusetts did not see any hurricanes in that time period. 2011’s Hurricane Irene was downgraded to a tropical storm before it hit Massachusetts.

Most Massachusetts insurers use private prediction models to estimate expected hurricane losses when rating and underwriting a policy.

Coakley claimed in her letter that the insurers are not appropriately detailing how they are using these models. She added that no regulatory body has reviewed most of these models to ensure that they are suitable for use in her state.

Not only are models not being reviewed, Insurance Commissioner Joseph Murphy is allowing the use of models that have been rejected in other states such as Florida, Coakley charged. Historically, these rejected models have inflated expected losses well above actual experience, she said.

Coastal areas have seen the greatest increase in homeowner insurance rates, especially in the Cape and Islands. For many insurers, modeled hurricane loss estimates are as much as 600 percent higher than non-hurricane losses in these areas, according to Attorney General Coakley.

Insurance Group Issues Rebuttal

A national insurance association strongly rebuked Attorney General Coakley’s claims. National Association of Mutual Insurance Companies says Coakley’s statements betray her lack of understanding of catastrophe models.

“The attorney general’s letter demonstrates a fundamental lack of understanding regarding the function and use of catastrophe models,” NAMIC stated on Friday.

Insurers use models to get the best estimate of their exposure to catastrophic loss, the group said. “They do this to ensure they will have sufficient capital to pay claims in the event of a catastrophic event, to keep their promises and meet contractual obligations to policyholders.”

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