Texas Legislators Tell State Farm to Cooperate or Face New Regulations

By Terrence Stutz, The Dallas Morning News 

Feb. 19--AUSTIN, Texas–Key senators warned the state's largest insurer Tuesday that it better start giving truthful answers about its business practices or it will wind up with new regulations it may not like. 

State Farm Insurance drew the wrath of members of the Senate Business and Commerce Committee during a hearing on a bill to revamp state control of homeowners insurance in Texas. 

Committee members said they were frustrated by the company's lack of cooperation in furnishing them information about its homeowners subsidiary, State Farm Lloyds Co., the largest writer of homeowners insurance in the state with about 1.2 million policyholders. 

"You're insulting our intelligence," Sen. Troy Fraser, R-Horseshoe Bay, said after a State Farm executive gave conflicting comments about the financial relationship between the homeowners subsidiary and its parent, Illinois-based State Farm Mutual Auto Insurance Co. 

"You're stepping across the line. This is serious, what we're dealing with, and we want answers. I have been trying for a year to get answers, and I'm not getting any," said Mr. Fraser, chairman of the committee. 

Sen. Ken Armbrister, D-Victoria, voiced similar sentiments, saying State Farm will have to live with the consequences if it can't help lawmakers understand the financial practices of the company. 

"Here's the deal," he said. "You don't answer our questions, you're going to end up with what we pass." 

He also questioned the financial manager for State Farm in Texas about his claim that the company's rates did not double in Texas last year. 

"My rates doubled with State Farm," Mr. Armbrister said. "Then I went home this weekend and found they tripled – and I don't have mold coverage." 

Jim Sylvester of State Farm promised to get additional information to the committee, but he acknowledged after some prodding by senators that State Farm Lloyds pays about 3 percent of its premiums to offset administrative costs of the parent company. 

A company spokesman said later that Mr. Sylvester was telling the truth when he initially said the Lloyds subsidiary pays no administrative fees to the parent company. 

He also insisted that funds are not transferred between the companies – though State Farm Mutual gave State Farm Lloyds a $1 billion loan last year after its reserves were wiped out by massive losses for mold and water damage. 

"There is no management fee. They boxed him into a corner and intimidated him into trying to give an answer when he was trying to be honest," said Keith Androff of State Farm Mutual. 

Unlike some other insurers, Mr. Androff said, it is not the practice of State Farm to charge its policyholders a management fee as part of their premium. 

Earlier, Mr. Sylvester said State Farm Lloyds paid out $1.90 in claims and expenses for every dollar in premiums it collected in Texas last year. The insurer has not taken on any new homeowners customers since September 2001 because of its losses. 

The testimony came during a committee hearing on a bill that would bring all Lloyds companies in Texas under rate regulation. Those companies – which hold about 95 percent of the homeowners market – are unregulated because of a loophole in state law. 

The measure by Sen. Leticia Van de Putte, D-San Antonio, would require prior state approval of all auto and homeowners rate increases, ban use of "credit scoring" by companies in setting rates and roll back homeowners insurance premiums by an estimated $1.9 billion. Several Democrats in the Senate have endorsed the proposal. 

In a related matter Tuesday, the House gave final approval to a Senate bill that would require companies to detail the premiums they charge for homeowners coverage as well as the justification for those rates. Companies would have to submit the information within 30 days. 

The rate information is being gathered to help guide lawmakers as they develop new regulations for the troubled homeowners insurance market. 

Many homeowners have seen their premiums double in the last year, while companies have reported massive losses, mostly stemming from mold claims. 

The bill returns to the Senate, which must approve some House amendments before it goes to the governor. 

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