News: 2006 Press Release

SAN FRANCISCO – Today, Insurance Commissioner John Garamendi took a major step toward reducing insurance rates for California homeowners and renters. For the first time in California history insurers have been ordered by an Insurance Commissioner to justify their current premium rates.

Commissioner Garamendi, in light of the extraordinarily low percentage of premium dollars used to settle policyholder claims, has ordered four major insurers – State Farm, Allstate, Farmers, and Safeco – to prove that their current rates are not excessive. If they fail to provide the necessary proof, rate reductions will be ordered, benefiting more than 4.1 million policyholders served by these companies.

“I will determine why up to 70% of the hard-earned dollars that consumers pay end up in corporate bank accounts, instead of being used for policyholder claims,” said Commissioner Garamendi. “If the rates are determined to be excessive, immediate reductions will be ordered.”

Today’s action follows a Department of Insurance study of the loss ratios of the top twenty insurers in California. A loss ratio is a measure of the relationship between the dollars paid out in claims and other expenses, compared to premium dollars collected from policyholders. The study found that the four companies, representing 51% of the California homeowners insurance market, pay far less than 50 cents of each premium dollar to settle policyholder claims.

In 2005 State Farm paid 37.6% of each premium dollar for claims; Allstate paid 41%; Farmers paid 37.7%; and Safeco paid 26.31%. Some insurers have claimed that such a large percentage of premium remaining with the company is needed to build financial reserves and surplus. However, the companies’ own filings with the Department disprove this contention.

“These companies have very strong financial reserves,” said Commissioner Garamendi. “Therefore, they do not need to build surplus by maintaining such extraordinarily low loss ratios. I will not allow the insurance industry to charge excessive rates at the expense of consumers.”

Under the California Insurance Code the Commissioner has the power to lower premium rates if they are “excessive.” In May the Commissioner unveiled a comprehensive Department study of Homeowners and Auto insurance rates, called “Lower Claims, Higher Profits: Where Do Your Premium Dollars Go?” It disclosed the historically low loss ratios that insurers had experienced over the past two years.

The study was undertaken in response to an emerging trend in which insurance carriers experienced dramatic reductions in the percentage of premium dollars used to pay claims. In 2003, for example, State Farm paid out 104.9% of its collected premiums to settle claims, yet still managed to make a profit due to investment and other income. The following year it paid only 32% of collected premiums to settle claims. In 2005 it paid only 37.6%. Other companies mirrored this trend.

“We all know where the rest of those premium dollars go,” said Commissioner Garamendi. “It is clear that these numbers are a compelling reason for this Department to conduct a thorough investigation and to determine whether these rates need to be reduced.”