Homeowners to Save $16 Million with Rejection of FAIR Plan’s Home Insurance Rate Increase

Proposed 6.8 Percent Overall Increase Intended Primarily for Insurer Profit

BOSTON – June 16, 2014 – (RealEstateRama) — After arguing that the FAIR Plan’s proposed home insurance rate increases for more than 150,000 Massachusetts families were excessive, Attorney General Martha Coakley announced that the Division of Insurance (DOI) rejected the rate request in a decision issued today. The decision saves homeowners from having to pay an additional $16 million in policy premiums.

“Homeowners should not be required to pour their money right into the pockets of insurers,” AG Coakley said. “This is real money that can stay in homeowners’ pockets. We are pleased that the DOI recognized that the insurers’ proposal was excessive and would significantly harm Massachusetts ratepayers.”

Jointly run by the state’s property insurance companies, the Massachusetts Property Insurance Underwriters Association (FAIR Plan), is a residual market designed to provide coverage at reasonable rates to homeowners who cannot obtain it in the open marketplace. This includes about 50,000 of families in urban areas, and 80,000 families on Cape Cod and other coastal communities, where insurance companies frequently decline to issue home insurance policies. The law requires that rates through the FAIR Plan are approved by the Commissioner of Insurance and are not excessive.

The insurance industry sought the Commissioner’s permission to raise rates for the FAIR Plan by an average of 6.8 percent across the state, and by over 9 percent in the communities of New Bedford, the Cape and Islands, Lynn Worcester Springfield parts of Boston and parts of Suffolk and Hampshire counties.

Despite its request for rate increases, the FAIR Plan has been steadily making money, which is uncommon for a residual market. During the six-year period from fiscal year 2007 through fiscal year 2012, the FAIR Plan profits amounted to over $250 million, or more than $40 million a year on average. In this proposal, the FAIR Plan requested its rate include a new ‘underwriting profit provision’ which would generate an additional $16 million in additional annual profit for the FAIR plan. Eliminating this additional profit request in the FAIR Plan’s proposal would eliminate the projected increase.

After conducting extensive discovery, cross examining industry witnesses, utilizing its own experts, and working in conjunction with the Massachusetts State Rating Bureau (SRB), the AG’s Office formally asked the Commissioner to reject the FAIR Plan’s proposed rate hikes on Nov. 4, 2013.

In addition to noting the FAIR Plan’s request for additional profits as improper, AG Coakley also argued that the rates should be rejected and reduced based on the insurer’s use of a hurricane model that has not been approved or tested for use in Massachusetts and on its use of flawed Massachusetts Property Insurance Underwriting Association (MPIUA) projections of future claim payments. AG Coakley also argued that the rates should be rejected because of the FAIR Plan’s excessive reinsurance expenses.

In today’s decision the Commissioner of Insurance agreed with the AG’s arguments, noting that “the MPIUA has continued to utilize a hurricane model that has not been shown to produce results that meaningfully reflect the frequency and severity of storms that are correctly classified as hurricanes in Massachusetts, develop measures of vulnerability that are specific to Massachusetts, and quantify other factors…”

In 2012, the AG’s Office successfully advocated to prevent two unprecedented rate increases sought by the FAIR Plan and the workers’ compensation insurance industry that saved both Massachusetts homeowners and employers more than $187 million.

The case is being handled by Deputy Division Chief Monica Brookman, Assistant Attorneys General Peter Leight and Lydia French, as well as Mathematician Burt Feinberg and paralegal Erica Harmon, of Attorney General Martha Coakley’s Insurance and Financial Services Division

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