Mass. Rejects 12.5% Fair Plan Rate Hike But Opens Door to Revised Bid

July 5, 2006

Almost 10 months after it was filed, Massachusetts Insurance Commissioner Julianne M. Bowler on June 30 disapproved the 12.5 percent average homeowners insurance rate increase submitted by the Massachusetts Property Insurance Underwriting Association (known as the Fair Plan). The filing included a 25 percent average increase for Cape Cod customers.

However, at the same time that Bowler nixed the 12.5 percent bid she expressed a willingness to approve a revised recommendation if it provides proof of the purchase of reinsurance and makes adjustments to certain loss estimates. She asked for the revised filing within 30 days.

According to Bowler, the original filing included the cost of reinsurance that the Fair Plan had not at the time of the filing purchased as well as certain projected post-hurricane losses that she determined were unreasonable and would result in excessive rates in some territories.

The Fair Plan said it had been reluctant to purchase reinsurance until it could be certain that the expense would be covered in its rates. Thus individual insurers participating in the plan have been relying upon their own reinsurance.

Bowler, who has criticized MPIUA’s failure to buy reinsurance, has now indicated that if the MPIUA demonstrates that it has purchased reinsurance, it may include in its rates the $13 million net cost of reinsurance as initially filed.

In addition, Bowler said that the residual market insurer must temper its cost figures for building materials and debris removal that various hurricane models do not capture.

The Fair Plan, which provides insurance for those who cannot obtain property insurance in the voluntary market, originally filed its rate bid last September. The insurer voluntarily “tempered” its rate request, exercising restraint under a new law that lifts caps on how much of an increase it can seek, according to John K. Golembeski, president of the Fair Plan. “Indications are that we could have gone for a higher amount however we indicated we would do this gradually and have tempered our request because of those commitments,” Golembeski told Insurance Journal last fall.

Hearings into the Fair Plan filing began in November with the State Rating Bureau and the Attorney General participating and criticizing various portions of the Fair Plan’s proposal.

In past years, rates for the Massachusetts residual market have been a matter settled among parties without lengthy proceedings. But that’s not been the case this time around. As the Fair Plan has emerged as a top writer of coastal properties in the state, its rates have come in for closer scrutiny.

Statewide, the Fair Plan has grown to be the third largest homeowners insurer. On coastal Cape Cod, the Fair Plan market share has ballooned from just four percent in 2000 to almost one-third today.

In addition to the reinsurance costs and so-called non-modeled losses, the hearings raised questions about how to estimate future property damage from hurricanes. The Fair Plan averaged the estimates of two hurricane forecasting models, one by Risk Management Solutions (RMS) of California and another by AIR Worldwide of Massachusetts. The SRB and the AG, however, argued that just the AIR model should be used.

However, in her decision, Bowler said she found the Fair Plan’s use of the two models to be reasonable.

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