Farmers Insurance responds to California Department of Insurance decision approving earthquake rating plan

Business Wire, June 7, 1995

LOS ANGELES--(BUSINESS WIRE)--June 6, 1995--Farmers Insurance Group of Companies Wednesday issued the following statement in response to approval by the California Department of Insurance of the company's earthquake rating plan:

"This long-overdue approval of Farmers' earthquake rating plan by the California Department of Insurance is a constructive step, but the fact that it took nearly one year to accomplish is harmful to Farmers and to our customers," said Jeffrey C. Beyer, vice president of corporate communications.

"It is clear that the administrative hearing process needs reform. We have spent more than $500,000 in a months-long hearing to comply with requests which ranged from reasonable, to arbitrary and capricious, to absurd." Beyer said Farmers' earthquake plan is the most reviewed insurance rate filing in the history of California.

The plan's approval will allow Farmers to plan beginning a selective return to writing new homeowners business in California on a limited basis. Decisions on accepting new business will be based on the effective date of its implementation and Farmers' continuing examination of its earthquake exposure, Beyer said.

Farmers rating plan called for statewide average increases in rates of 174 percent for homeowners earthquake insurance, but the company received average statewide increases of only 138 percent, Beyer said. For commercial earthquake insurance, Farmers requested 117 percent, but received an increase of only 96 percent, Beyer said.

"Our new rating plan seeks to apply the lessons learned from the devastating Northridge earthquake and is designed to more accurately manage the risk facing property insurance exposures throughout the state," Beyer said.

Farmers said the new plan, as part of the company's overall risk management efforts, will realign its geographic rating zones and adjust rates for earthquake insurance statewide so that property in areas of greater risk will be charged appropriately higher rates than those in lower risk areas.

Beyer said similar new earthquake rating plans have been filed in a variety of states throughout the country, including Washington, Illinois and Tennessee. The plans have been approved and implemented in Indiana, Ohio and Missouri.

Farmers' earthquake plan also offers the new option of a basic earthquake policy. This newly developed policy from Farmers will give consumers the option to choose coverage limited primarily to the primary structure of their homes at a significantly more affordable rate than the traditional policy since it will not offer the same level of coverage for contents and exterior structures, such as patios or fences.

For example, a home insured for a replacement cost of $200,000 in Los Angeles with a traditional policy would have an annual premium of $528, compared to a basic policy with a premium of $240.

"This plan, in addition to other recent actions, is important to Farmers' efforts to prudently manage an earthquake exposure that is unacceptable to the interests of our customers," Beyer said. "Fundamentally, this helps protect our financial strength for all of our customers nationwide, and our ability to continue to grow.

Farmers said the much-needed rate increase, while lower than the amount sought and significantly delayed, will be helpful in controlling the growth in earthquake exposure and maintaining the company's financial strength in light of the unprecedented losses incurred as a result of the January 1994 Northridge quake, which resulted in expected losses to date of more than $1.7 billion.

Despite the increases in earthquake insurance rates, Farmers said there is a continued need for a longer-term solution to catastrophe coverage, such as the Natural Disaster Protection Partnership Act being considered by Congress.

"Unfortunately, the destruction caused by the Northridge earthquake proves that private insurance companies alone cannot handle the cost of earthquake damages," Beyer said.

Farmers Insurance Group of Companies, with headquarters in Los Angeles, is the largest California-based homeowners insurer.

CONTACT: Farmers Insurance, Los Angeles

Jeffrey C. Beyer, 213/930-4149

John C. Millen, 213/932-3083