Mississippi Reacts to the State Farm Announcement

Insurance Journal has posted a nice summary of reactions by a few Mississippi officials to yesterday’s announcement that State Farm would stop accepting new property business in the state.

My “favorite” passage in the article:

State Attorney General Jim Hood blasted State Farm, maintaining that by delaying legal proceedings and not paying settlements in a timely manner, the insurer created and profited from the very legal environment it now seeks to escape.[...]

According to Hood, State Farm “oversold itself on the coast” and couldn’t pay claims based on the rates it charged. He reeled at the earnings he said State Farm reported for 2005. “It’s unfortunate that in the most catastrophic year in U.S. history, they increased their profits by $3.9 billion up to a net worth of over $50 billion – unbelievable!” Hood said.

If memory serves, wasn’t Hood one of the folks calling on flood exclusions in homeowners policies to be declared void due to being contrary to the public interest?

It’s exactly that sort of extracontractual liability that is on the surface of State Farm’s intent to stop accepting new business, and which caused Mississippi to drop down a few notches on most insurers’ new-state-product-launch lists.

Also, the reference to profit seems a bit gratuitous. True, it’s difficult to stomach claims of rate inadequacy at the same time as record profits are being recorded. However, it’s important to remember that insurance works best when subsidization is minimized.

Implying that because an insurer made profits inland, the insurer may not achieve adequate rates on the coast is a call for subsidization. If enforced, it places insurers who write both on the coast and inland at a competitive disadvantage to those who write only inland. And that’s a sure-fired way to set up a spiral of an availability crisis.