Florida Agency Orders Freeze on Insurer’s Rates : Regulation: Probe launched into memo saying Hurricane Andrew was ‘an opportunity to get price increases.’
The Florida Insurance Department ordered a freeze on the rates of American International Group and launched an investigation of the insurer’s pricing, prompted by an AIG executive’s statement in a memo that Hurricane Andrew was “an opportunity to get price increases.”
Florida Insurance Commissioner Tom Gallagher, in a statement Wednesday, accused New York-based AIG of illegally planning “to exploit the devastation caused by Hurricane Andrew to satisfy a desire to raise insurance rates.”
He said the Insurance Department and the office of Florida Atty. Gen. Bob Butterworth would probe the insurance giant’s rate-setting while the 60-day freeze is in effect.
AIG Chairman Maurice R. (Hank) Greenberg responded that the company will request a hearing, during which “we are confident the facts will clearly show that the order was based on a misunderstanding of AIG’s intentions, that it attributes motives to AIG that are inaccurate and that it paints a grossly distorted picture.”
The two-paragraph memo was written by Greenberg’s son, Executive Vice President Jeffrey W. Greenberg, and dated Aug. 24, the day that Andrew struck Florida.
After predicting correctly that Andrew could cause the largest storm loss ever, the memo said: “The industry cannot absorb the loss and the cash hit without increasing rates. . . . This is an opportunity to get price increases now. We must be the first and it begins by establishing the psychology with our own people. Please get it moving today.”
The senior Greenberg, in a statement Wednesday, said his son’s memo was “taken completely out of context.” He said it was “nothing more than one aspect of a broader internal discussion we have been having for some time about the need for increased rates in the commercial insurance sector.”
Gallagher sent a letter to all 780 property/casualty companies doing business in Florida warning that “the department will reject any effort to take advantage of consumers and that we will take legal action against any company that attempts to do so.”
*
In Florida alone, the hurricane caused 39 deaths and insured damage estimated at $7.3 billion.
AIG announced last week that its hurricane losses will reduce its third-quarter pretax earnings by $75 million to $100 million. AIG reported net income of $840 million for the first half of 1992 on revenue of $8.9 billion.
Separately on Wednesday, State Farm Insurance said it would pay out about $1.5 billion in storm-related claims, the largest damage total for a single insurer and about twice its initial estimate.
For State Farm, “it probably wasn’t going to be a profitable year anyway,” spokesman Jim Stahly told Bloomberg Business News. “Now it definitely won’t be.”
The Bloomington, Ill.-based mutual insurer has policies on about 25% of the insured housing in the area south of Miami that was hit by the storm. It also has a large share of the area’s insured auto market.
Allstate Insurance Co., with about 20% of the insured housing market south of Miami, said last week that it expects to pay $1.2 billion for 165,000 claims. It said the claims will cut third-quarter earnings by about $700 million, resulting in a quarterly loss for its parent, Sears, Roebuck & Co.
