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“We need not to have to just take the industry’s word that they are making good deals. We need to be able to look at those deals and see that they’re legitimate and not ‘brother-in law’ deals.” remains. Last November, a state district court found that Texas regulators could order State Farm to refund the money. State Farm appealed. The rate dispute is still in court. The company has yet to pay a dime. This was hardly an anomaly. “State Farm has been the most aggressive of all insurers in the state when it comes to bucking TDI,” says Texas Watch’s Winslow. “It constantly uses its size to bully the department. Time and again, it refuses to comply with the TDI orders, instead choosing to litigate.” It matters little whether State Farm wins these battles, Winslow says. The point is to keep regulators so busy that they think twice before challenging State Farm. The sequence of claim and counterclaim, suit and countersuit, is almost like a vaudeville routine. Every player has its own numbers, its own agenda, its own definitions of terms. Insurance is supposed to be straightforward, a matter of pure math. Instead, it’s a wonderland of exotic creatures and magic words, a world where everything normal is turned upside down. Insurance disputes often are underplayed in the public and press because they’re so complicated. Take insurance regulation. It’s based on the idea that there is such a thing as an excessive rate. Whether a rate is determined to be excessive is the result of a complex and baroque set of actuarial calculations, but the basic rule of thumb is that 60 percent of the premiums collected by insurers are supposed to be paid out in claims. The remaining 40 percent can go to profit and business expenses. If State Farm or another insurer is paying out less than 60 percent in claims, regulators can order the company to reduce its rates. If they find that rates have been too high, TDI can order the insurance company to refund the overcharges to customers. Regulators base those requests on long-term trends. “One year does not an average make,” Beck says. It’s the long-term averages that matter, and rates shouldn’t vary that much from year to year. The fact that a company loses money one year doesn’t mean its rates were fair, just as the fact that it made money one year doesn’t mean they weren’t. IN PRACTICE, rate reductions and refunds are rare. One reason is that state regulators are chronically overwhelmed by rate requests. According to Ben Gonzalez, an Insurance Department spokesperson, state actuaries were still reviewing State Farm’s September 2009 rate increase when the April 2010 request came in. This might sound like an easy problem to fix: Hire more actuaries. Even if legislators were willing to raise the Insurance Department budget, there would still be a problem: The numbers in rate filings would remain slippery. “We all have actuaries,” says department spokesperson Jerry Hagins. “When we try to figure out how much companies should be charging, OPIC’s numbers are the lowest, State Farm’s are the highest, and ours are somewhere in between.” Each defines “loss” differently. Consumer advocates think insurers should base rates on how much they’re paying in claimsthe “pure-loss ratio.” It’s designed to force insurers to be efficient with their expenses. Insurance companies don’t like that metric. They want to set rates according to a “combined-loss ratio,” which counts losses plus expenses. Using that formula, State Farm claims it has lost money over the last 15 years on homeowner insurance in Texas. Addressing the Insurance Department’s claim that the company owes $310 million to customers, State Farm argues on its website that it can’t have been overcharging customers because it’s losing money. “As our public financial statements show, State Farm Texas’s homeowners insurance business overall, for the past 15 years, has been unprofitable, despite State Farm’s use of the rates TDI now seeks to reduce retroactively.” Beck says this is simply not true; that $1 billion State Farm collected that they shouldn’t have. They were definitely making a profit.” Would the company stick around otherwise, she asks, “out of the goodness of their hearts?” What State Farm means by “unprofitable” is that expenses were greater than revenues. What constitutes expenses? According to Davis, the company spokesperson, “overhead, building costs, and employee compensation.” Also “reinsurance expenses,” which include the money that State Farm Lloyds pays to the parent company for reinsurance. That’s what Texas Watch calls “moving money from one pocket to another.” “There’s very little transparency,” Beck says. “We don’t know: Has the insurance carrier gotten a good deal? Does this diversify the risk? Is the reinsurer a quality reinsurer?” Not every insurance company needs reinsurance. “Remember what the point of insurance is,” Beck says. “It’s to spread around your risk. If you’re a little company in Houston and you write 90 percent of your policies on the coast, then yes, you should buy reinsurance, because if a hurricane comes along, you can’t possibly absorb that kind of loss.” It’s less clear that a company like State Farm needs reinsuring. “They’re a large, diversified national company with risks spread,” Beck says. “They’re writing all over. They should be able to absorb a regional loss.” Even if State Farm Lloyds needs reinsurance, Beck says, “it’s not clear how buying from their parent company helps to spread their risk.” Beck would like to see the books. “We need not to have to just take the industry’s word that they are making good deals,” she says. “We need to be able to look at those deals and see that they’re legitimate and not ‘brother-in-law’ deals.” But she can’t look. Nor can the public. State Farm sees no problem. “All of the information was submitted to the TDI,” says spokesperson Davis, “and the TDI acts on behalf of consumers on these matters, and they have these documents, and they make determinations on behalf of customers. Their role is to protect the public interest.” But if we can’t see the information, how can there be any public accountability? How do we know the Insurance Department is doing its job? “I can’t comment on whether the TDI is doing its job,” says Davis. On State Farm’s website, there’s a section called “Setting the Record Straight” that encapsulates the company’s attitude toward regulation. The company argues that it shouldn’t have to pay what TDI says it owes Texas customersbecause it would have devastating effects on the business. “The financial impact of this order on State Farm Lloyds,” the post reads, “is comparable to the financial strain caused by Hurricane Ike, the third most destructive hurricane to ever make landfall in the WWW.TEXASOBSERVER.ORG