State Farm Defends Auto Rate Hike : Insurer Says 9.6% Increase Spared Consumers a 32% ‘Jolt’

Officials of State Farm, California’s largest seller of auto insurance, testified Monday that if they were really putting their private passenger auto business on a paying basis, they would be implementing a 32.2% average statewide increase, not the 9.6% they have announced.

Appearing at a hearing called by State Insurance Commissioner Roxani Gillespie to determine whether the company’s $149-million January rate increase was justified, the officials said that in order to remain competitive and not give State Farm policyholders a “jolt” all at once, company executives had decided to limit the increase for now.

“We’re moving toward an actuarially sound rate,” said Judith K. Mintel, a State Farm counsel. “We didn’t get all the way there in one spurt.”

Mintel and State Farm actuary Jerry Hillhouse said a survey of policyholders of the Bloomington, Ill.-based company had shown they would prefer getting smaller increases relatively frequently rather than a big one all at once.

At the same time, they said, State Farm has no current plan to raise rates again at any specified date.

The daylong hearing was marked by sharp questioning of State Farm’s loss figures by representatives of consumer groups and state Sen. Alan Robbins (D-Van Nuys), chairman of the Senate insurance committee, and forceful suggestions by Gillespie that the company was not making a compelling case for even the smaller rate increase.

Gillespie and other Insurance Department officials said they will review Monday’s testimony and other evidence to be submitted later for and against the rate increase and decide whether it violates state law by being excessive, inadequate or discriminatory. Should an adverse finding be made, Gillespie could issue a formal notice of non-compliance against State Farm, but the company would have the right to request another, more formal hearing.

In any event, the process is expected to take many weeks and, in the meantime, State Farm’s 9.6% increase will stand--unless the state Supreme Court, which is expected to rule within the next several months on the overall constitutionality of Proposition 103, upholds the rate rollbacks called for in the insurance reform initiative approved by voters last November.

At the hearing State Farm sought to show, through a variety of statistical data, that its claims, particularly those involving bodily injury liability and uninsured motorists, are mounting much faster in California than nationwide and that it has been losing money on its more than 3 million auto insurance policies here for some time.

On $1.7 billion in private passenger auto premiums collected in California in 1988, Hillhouse said, the company sustained a $325-million underwriting loss, and investment income was less than half that amount.

Gillespie, however, expressed disappointment that State Farm representatives had failed to tell exactly how each dollar collected in premiums was being spent.

“I continue to be very confused,” the insurance commissioner said. She said she wanted to know exactly how much State Farm is making from investments of its California premiums, how much it is paying in claims, how much it has in dollar reserves and how much it is spending on legal defense. The statistics the company provided on claim frequency and its comparisons with national trends are no substitute for the dollar figures, she said.

Hillhouse and other State Farm officials said they did not have such figures available.

Harry Snyder, West Coast director of Consumers Union, challenged State Farm officials on their claims that they would have been justified in taking a much larger increase, finally getting Hillhouse to acknowledge that it is often a business decision, not based on actuarial facts, that dictates what State Farm decides to charge its customers.

Steven Miller of the Insurance Consumer Action Network and J. Robert Hunter of the National Insurance Consumer Organization tried to make the point in their questions and statements that State Farm had not provided enough information at Monday’s hearing to show that it actually has been losing money on its auto insurance business.