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HIS SPRING, TEXAS’ BIGGEST INSURANCE company took the unusual step of try ing to hike homeowner’s insurance rates for the second time in eight months. The first increase had come in September 2009, when State Farm Lloyds Inc.a division of the giant insurer that handles the most residential policies in Texasjacked its monthly premiums by 8.8 percent. Then in April the company, which controls nearly 30 percent of the marit planned to raise rates again, this time by 4.5 percent. For the average State Farm customer in Texas, the two rate hikes would equal about $198 more in premiums each year. But that wasn’t the biggest worry for Mike Geeslin, commissioner of the Texas Department of Insurance. Rather, what worried Geeslin the most was the possible follow-the-leader effect. Because State Farm is the largest player in the market, its pricing has an outsized influence on other insurers. Rate increases are typically smaller and spaced out over longer periods. If State Farm raised rates again, Geeslin feared, other insurers would assume that State Farm knew something they didn’tand raise their own rates. Geeslin’s power to say no is limited. In fact, Texas’ chief insurance regulator has little direct control over insurance rates. So he wrote State Farm a letter, asking the company to wait. So many rate hikes in such a short time “may indicate a lack of rate making discipline and lead to market instability,” he told State Farm. After nearly a decade of politicians promising reform, Texas already had among the highest rates in the country. Until Florida passed us this year, Texas’s rates were the nation’s highest for homeowner coveragehigher than states with more expensive homes and greater threats from natural catastrophes. Was Texas headed back to last place? “It is my hope,” Geeslin’s letter concluded, “that State Farm Lloyds reconsider the timing of this filing and will voluntarily withdraw it.” That was a quaint notion. State Farm responded that it had taken TDI’s objections under advisement, but would move ahead with the rate hike anyway. At that point, Geeslin tried another strategypublic embarrassment. In its rate-increase filings, according to State Farm spokesperson Kevin Davis, the company included information justifying its request. Geeslin thought one justificationrising costs of “reinsurance” would look particularly bad if Texans knew about it. Reinsurance is insurance that companies like State Farm buy to protect themselves against a catastrophic number of claims. It’s essentially insurance for insurance companies. On paper, it’s a way to diversify the risk of some horrific regional disastera Category 4 or 5 hurricane, for example. But increasingly, companies are making their customers pay for it. Reinsurance costs, says state regulator Deeia Beck, “are becoming a bigger and bigger part of homeowner premiums.” Beck heads the Office of Public Insurance Counsel Texas insurance customers. She says reinsurance makes up about 10 percent of the average Texas homeowner premium. So if you’re paying $1,200 a year about average$120 is going to reinsurance. Where does that money go? Some of it comes straight back to State Farm. Reinsurance is one of the least-trans parent, least-regulated areas ofinsurance. Most providers are beyond the reach of regulators in money havens like Bermuda, the Cayman Islands and Switzerland. One of the biggest reinsurers is State Farm Mutual Automobile Insurance Co., the parent of State Farm Lloyds. In effect, State Farm is jacking up its profits by “buying” insurance from itselfand charging customers for it. “It’s a giant shell game,” says Alex Winslow, head of the nonprofit watchdog group Texas Watch. “State Farm Lloyds buys reinsurance from the national State Farmand they mark that as a loss on their books.” They then “use that as an excuse to hike their rates.” State Farm Lloyds says there’s nothing wrong with buying reinsurance from State Farm; the company just doesn’t want anyone to know about it. Geeslin thought the public should know. Armed with data the company had provided, he wrote State Farm again and said he was considering placing the reinsurance data on the Insurance Department’s website. State Farm balked and threatened a lawsuit. In a statement on its website, the company argues that “these documents contain confidential proprietary information that is valuable to other insurers and would harm our competitive position.” Geeslin could have posted the information anyway. Instead, he asked a state district judge for permission. The judge upheld State Farm’s claim that the information needed to remain secret. Now the rate filings are locked away at TDI. No one but the commissioner and his actuarial staff can lookand State Farm customers can’t tell how much they’re paying the company to insure itself. The episode says a lot about the weakness of insurance regulation in Texas. And it reflects a broader trend in Texas: State government fails to rein in the excesses of large corporations while consumers pay the price. The recent history of State Farm vs. Texas is a perfect example. STATE FARM has been quarreling with Texas regulators for five years. And the company has mostly come out victorious. The legal battle between State Farm and the TDI began in 2003. That year, the state Legislature passed a huge insurance reform bill that was highly favorable to industry. The bill implemented the system that allows companies to hike rates without permission from state regulators. It also ordered a comprehensive review of homeowners insurance rates. During the investigations, TDI determined that State Farm’s rates were “excessive,” and the department ordered a 12 percent rate reduction. State Farm refused and took TDI to court. This would become a pattern. After five years of legal wrangling, a district court ordered hearings on whether State Farm had overcharged. But, while the dispute plays out in court, Beck calculates that State Farm has continued to charge “excessive rates,” adding up to $1 billion in overcharges from 2003 to 2008. Beck took her findings to TDI Commissioner Geeslin, who had been appointed by Gov. Rick Perry to lead the department. The Insurance Department’s actuaries determined that State Farm had indeed overcharged, though by less than Beck had calculated. In 2009, Geeslin ordered State Farm to return more than $310 million. Once again, State Farm balked. The company took the TDI back to court on a technicalityand there it “It’s a giant shell game.” READ more about the history of CI homeowners insurance rates in Texas at tx1o.comlingoodhands JUNE 11, 2010 THE TEXAS OBSERVER 13