Cancellation of State Farm Car Insurance Hike Pushed

Three consumer groups that are taking part in a state Department of Insurance investigation of a recent $150-million California auto insurance rate increase by State Farm formally requested the department Monday to order the increase canceled.

The Insurance Consumer Action Network, the Consumers Union and Common Cause told state Insurance Commissioner Roxani Gillespie that an actuarial study they had commissioned showed that State Farm, California’s largest seller of auto insurance, is over-capitalized and inefficient and ought to be reducing, not raising, its rates.

State Farm officials had told a March 20 Insurance Department hearing that if they were really putting their private passenger auto business on a paying basis in California, they would be implementing a 32.2% average increase, not the 9.6% they have announced.

But the consumer groups said Monday that their actuary, J. Robert Hunter of the National Insurance Consumer Organization, found that the company has collected $318 million too much from its auto insurance policyholders in the last 11 years and that it ought to now be reducing its rates by 27%.

Steven Miller, head of the Insurance Consumer Action Network, told a Los Angeles news conference that Hunter’s study of figures provided by State Farm indicates that it is one company that could easily withstand the 20% rate rollback from 1987 levels called for under Proposition 103, the insurance initiative whose constitutionality is under review by the state Supreme Court.

Miller said that while the Supreme Court reviews the case, the consumer groups are only asking Gillespie to cancel the 9.6% increase, not to order an actual premium reduction. The court’s ruling is expected by June.

Later, Gillespie declined to comment on the recommendation, noting that the file in the Insurance Department’s investigation will remain open for comments from all parties until next Monday, after which the department will decide the matter.

A State Farm attorney, Judith K. Mintel, said State Farm would have no comment either, except to say that it continues to view its rate increase as “fully justified.”

In their filing with Gillespie, the three consumer groups made the following points:

- State Farm’s surplus, which is analogous to the retained earnings of a stock company, is “extraordinarily high.” While most companies keep $1 in surplus capital on hand for every $3 in premiums, State Farm keeps $1 for every $1 in premiums.

- The company had investment income on its California auto premiums of $228 million in 1988 alone, and this is “the real source” of the profitability of its business.

- State Farm does not operate as efficiently in handling expenses as such companies as 20th Century and United Services Automobile Agency.

- The company in its reports to the Insurance Department has understated the increase in its collected premiums in California by ignoring the tendency of policyholders to upgrade to more expensive cars.

- It failed to include millions of dollars it collects from a $27-a-car fee it charges new customers in the figures submitted to justify the recent rate increase.

- It is including in its figures a 7.2% surcharge to all regular customers for losses it says it has sustained with its assigned-risk policyholders, and this surcharge is unjustified.

Even if Gillespie were to find the State Farm rate increase unjustified, the company could demand a regular public hearing procedure before having to roll back its rates.

In other developments, meanwhile, it was disclosed that Colonial Penn has raised its auto insurance rates for many customers in the state by about 25%, and Gillespie announced that she is charging seven insurers with sloppy rating practices, giving them 10 days to rectify matters or face a public hearing.

Gillespie’s department cited Maryland Casualty Co., Northern Insurance Co. of New York and Assurance Co. of North America for numerous alleged rating errors in private passenger auto and commercial policies. Also cited were Federal Insurance Co., Pacific Indemnity Co., Vigilant Insurance Co. and Alliance Assurance Co. for alleged rating violations in liability coverage for corporate directors and officers.