Companies Decry Effort to Reassess Homeowner Risk
By LAURENCE DARMIENTO
Insurers are challenging Insurance Commissioner John Garamendi’s efforts to limit the industry use of electronic claims data in underwriting homeowners’ policies.
With prices rising and policies harder to obtain, Garamendi had issued a notice that would require insurers to look beyond numerical data in making underwriting decisions.
But insurers contend that the new requirements are an effort to upend traditional practices by requiring insurers to rely on subjective judgments instead of objective data.
Earlier this month, the industry scored a legal victory when a Superior Court Judge in Sacramento temporarily put the requirements on hold. A hearing on whether to quash them altogether is scheduled for July 17.
“If you have had a claim, then you are far more likely (to file another) than someone who has never had one,” said Dan Dunmoyer, president of the Personal Insurance Federation of California, one of the trade groups that sued Garamendi in June.
Garamendi’s missive, he said, turns 100 years of underwriting practices on their head.
Garamendi says strict numerical formulas that estimate future risk based on the number of past claims have resulted in unfair decisions raising rates and denying coverage to homeowners who were either not at fault or who have rectified any problems.
“While (databases) are useful, and they can and should be used, they’re not the only factor that determines future risk,” Garamendi said. “In fact, they may obscure, hide and distort future risk.”
Garamendi wants insurers to further evaluate past claims, such as for water or roof damage, to better determine whether they are an indicator of future risk.
The notice was issued during what has been a turbulent time in the insurance industry, particularly the homeowners’ sector.
Nationwide, insurers have been raising rates in a variety of business lines to compensate for falling investment returns, catastrophic losses and years of under-pricing policies.
In the homeowners market, insurers have been hit with expensive claims for water damage over fears of mold. State Farm General Insurance Co., California’s largest homeowners insurer, no longer accepts new applicants in the state because of its past losses.
At the same time, there has been concern among consumer groups over the use of large electronic databases, such as the Comprehensive Loss Underwriting Exchange, which provide insurers with access to an applicant’s claims history with all participating companies.
The groups charge that insurers jump on the scantiest information from the databases to deny coverage or raise rates.
“The commissioner wants to remind the industry that during a tough financial time you cannot take advantage of your customers in order to squeeze out more profit,” said Doug Heller, an insurance specialist with the Foundation for Taxpayer & Consumer Rights.
Others say the industry has historically relied on subjective methods.
Brian Sullivan, editor of the trade magazine Property Insurance Report, said the use of databases and strict numerical formulas have become industry standard only over the past decade or so. Ironically, he said, the change came in response to consumer activists who wanted insurers to rely on objective measures to ensure applicants were not victims of discrimination or red-lining.
The traditional method of underwriting homeowners insurance involved a fair amount of subjective judgments by field agents working in coordination with the home office. “Agents would look at a person and say, ‘I think he’s a good risk,'” Sullivan said.
The use of claims databases is also raising concerns in other states, but Sullivan said Garamendi’s action puts him at the forefront on the issue.
Garamendi said he simply wants companies to look further at claims to ensure homeowners are not being unfairly penalized.
“What we are saying here is that taking into account future risk does bring into the process an additional factor, which is not subjective but factual. What are the facts?” he said.
As an example, Garamendi said a homeowner whose sole large palm tree was knocked over during a windstorm and caused $50,000 in roof damage should not be subject to higher premiums if there are no other such trees in the yard.
However, industry officials say even that simple a scenario is fraught with complications. One insurer might agree with Garamendi’s analysis, Dunmoyer said, while another might say that the homeowner failed to notice the tree was rotten and should be penalized since it might be a harbinger of other unnoticed risks.
He said the safest route is for insurers to rely on the established fact that homeowners with past claims represent more of a risk than homeowners that don’t have them.
The industry has based its legal challenge on an allegation that Garamendi overstepped his authority in issuing a new regulation via the advisory notice, which is only supposed to remind insurers to follow existing regulations. Garamendi said the notice only reflects existing law.