State Farm turns down clients to boost financial rating

Public Record, The, Jul 16, 2002 by Kleinschmidt, Janice

The insurance industry in the United States sustained $20.3 billion in property losses from the Sept. 11 terorist attack, but the onslaught of claims has stretched well beyond the borders of New York. According to the Insurance Information Institute, homeowner insurance losses have reached an estimated $19 billion.

"The extraordinary number of catastrophes, the high cost of home repairs, the aging of the U.S. housing stock and the emergence of mold claims are pushing homeowner insurance rates upward," says Loretta Worters, vice president of the New York-based Insurance Information Institute. "Mold claims, which were virtually unheard of just a few years ago, cost insurers more than $1 billion dollars last year, approximately five times the cost in 2000."

In California, homeowner losses particularly water-related caused State Farm Insurance Company to place a moratorium on issuing homeowner policies to new clients and to direct its agents to scrutinize new automobile insurance applicants. Worters, knows of no other companies that have taken this drastic step.

According to George Stettler, a State Farm agent in Cathedral City, the directive for homeowner insurance went into effect May I and for automobile insurance June 1.

"State Farm handles 18 percent of the business in the state. They're No. - 1 or 2 in homeowner insurance and first in auto," says Stettler.

"It was a financial decision that we were forced to make because of ongoing losses on homeowner insurance," says Sacramento State Farm spokesman Bill Sirola. "The easy part of this industry is selling a policy. The most difficult and most important part is making sure we are financially solid enough to honor all the promises we make."

A. M. Best, a financial information company specializing in insurance, downgraded State Farm's rating from A- to B .

"We just do not feel comfortable with less than the highest financial rating we can achieve," Sirola says. "We are going to be more prudent than we are aggressive."

Stettler has been submitting non-binding applications for auto insurance on a daily basis and all have come back approved. However, he adds, he is unable to issue immediate coverage, as the proms takes a week to 10 days.

Harold Blumberg, also a Cathedral City State Farm agent, is not selling new homeowner or automobile policies except to existing clients and family members.

"We are dedicated to doing the right thing for our clients and also for the company, and if the company feels at this time this is what we have to do to maintain the strength of State Farm to protect all the policyholders, I as an agent of 37 years go along with it, Blumberg says. "It is not very comfortable to have to say 'no' to clients who want to insure with us, but it is one of those things we have to do... We hope that will turn around soon."

Until it does, Stettler says he will direct his attention to contacting clients before their insurance renewal dates. He states that new policyholders make more claims than existing policyholders.

"Mat's generally true," Sirola says. "New policyholders are looking for an insurance company for a reason." For automobile policies, it could be applicants are newly licensed or have bought their first car - "any number of reasons that don't fit into an easy definition."

"The average cost of claims in homeowner insurance has increased over the last two years significantly beyond anything we could have expected for reasons that are not clear," Sirola says. He says the company understands the situation State Farm agents are facing.

"That is the truly unfortunate aspect of decisions like this," Sirola says. "It is not just our prospective policyholders. It is the fact that our independent insurance agents who make their living marketing State Farm services are really adversely affected by an announcement like this."

Last year, Sirola says, for every $100 in premiums received, State Farm paid out $122 in claims and expenses.