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Lawmakers to Stop Use of Short Term Models

February 5th, 2008 by Mike Vasilinda

For the second day in a row, insurance executives faced tough questions from state lawmakers over how rates are determined. There is a consensus that the companies are using a near term loss prediction model which hasn’t been approved and as Mike Vasilinda tells us, may be driving rates up.

Hear it here: Lawmakers to Stop Use of Short Term Models

Florida Farm Bureau was the third company to testify under oath.

The company is under fire for seeking a 30 percent rate hike when rates should be going the other way. An inability to explain why the hike was needed irritated the panel.

“The construction cost went down and you have fewer policies because you dropped some, which you attributed to attrition after dropping them, why is your cost staying the same?” Senator Rhonda Storms said.

The insurance Florida Farm Bureau buys to cover losses went from21 to 66 million over three years. The increase was based on a new, unapproved model, predicting more frequent storms. Senators challenged the validity of the model.

“Every single time, you’ve distanced yourself from this calculation and this short-term model being used in your increasing rate,” Senator Steve Geller said.

Until the hearing, no company had acknowledged it changed the rules for assessing risk.

“You saw today, footnotes from the insurance company, that said this information is actually going to overstate losses and yet we’re going to apply it anyway,” Senator Jeff Atwater said.

The use of the near term model began after the 2005 hurricane season.

The most likely outcome of these hearings is legislation that will tell insurers exactly what models they can use.

No one could put an exact number on the effect of using a model predicting more storms, but the company conceded it likely added about 15 percent to the cost of insurance.

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