State Farm cuts more services in West Virginia

CHARLESTON - When State Farm, the state's largest automobile insurer, announced a moratorium on new business, consumers immediately were reminded that West Virginia's insurance problems are not limited to medical liability.

West Virginians looking to buy new automobile policies will have to

Why? The companies cite increased claims severity and a difficult legal environment, similar reasons medical liability insurers have given for leaving the state or tightening their underwriting.

Losses are mounting

"Everyone is experiencing increased losses and claims severity," West Virginia Insurance Commissioner Jane Cline said. "We are definitely in a hard market right now."

As State Farm, Allstate and some other companies scale back their West Virginia market share, they also are requesting premium increases.

Cline said the Insurance Commission receives about 500 requests for form changes or rate increases each month. An independent actuary reviews each request to determine whether existing rates are inadequate.

In the auto insurance line, Cline said

Allstate has a pending increase and State Farm has filed for a rate hike. She said even with State Farm's moratorium, the commission can grant a rate increase on current customers if it is warranted.

Don Griffin, assistant vice president of business and personal lines for the National Association of Independent Insurers, said with an ultra-competitive auto insurance market in the 1990s, premiums were kept down, but companies no longer can sustain the premiums they endured for many years."

He said companies such as State Farm most likely are correcting for some overexpansion, but rising loss trends are a larger problem impossible to ignore.

"As a whole consequence of many things, especially mounting losses, companies are re-evaluating their underwriting," Griffin said.

The homeowners' insurance market, in particular, has been hit hard, he said. But while West Virginia's largest auto carrier is pulling back, Griffin said he does not see a nationwide problem with automobile insurance.

Stock losses not the problem

While some critics of the insurance industry have pegged their problems on bad business practices and investment losses, Cline stressed that any company permitted to write business in West Virginia does so under state guidelines. Stock losses do not play as large a role in an insurance company's overall financial situation as some may believe.

"The reality is we monitor companies for their financial performance. We evaluate companies' financial statements on a quarterly basis," Cline said. "We don't let companies get rate increases because of a loss in investment income."

Jeff Vangilder, director and chief examiner of financial conditions at the commission, said West Virginia, like all states, has laws about how much and what kind of investments admitted insurance carriers can have.

"Companies must have conservative, good-quality investments," Vangilder said.

He said eventually rates will catch up to where premiums and a company's investment income bring in more money than companies pay out in claims. When that happens, companies will come back to the market, he said.

Everything costs more

Griffin said both homeowners and auto insurance are suffering from rising costs, a problem that is likely to remain.

Construction costs more now than it did before, so repairs cost insurance companies more, adding to the expense of a homeowners' claim.

In automobile insurance, the rising costs of health care and car repairs contribute to more expensive claims.

"Medical costs were stagnant for a long time, then the last two to three years they've really gone up," Griffin explained. "Cars are more complex now than in the past, so it is more expensive to fix them."

While the economy could rebound, consumers most likely will have to accept that premiums will be higher.

"They were probably too low before," he said. "Consumers ought to be shopping around, if they can. ... Companies treat (rising costs) in different ways. As a consumer, you need to call some companies and shop around. It keeps competition going."

Griffin said most experts see another one to two years of a hard insurance market, and a turnaround will depend in large part on what happens with the economy and inflation.

"If inflation is held down, that would help," he said. "Businesses are having a tough time everywhere; it's not just in insurance."

Legal environment adds to problems

Part of what the insurance industry requires for an "insurable risk" is that a given group of policyholders must be large enough to make losses predictable.

In West Virginia, however, a small population is compounded by a lack of predictability. Erin Bailey, State Farm's West Virginia spokeswoman, said one specific problem in West Virginia is something that medical liability insurers no longer have to worry about - third-party lawsuits for unfair trade practices, commonly called third-party bad-faith lawsuits.

In this type of lawsuit, plaintiffs can sue the defendant's insurance company directly.

Last year lawmakers included a provision in a tort reform package that stipulated after March 1, 2002, no third-party bad-faith lawsuits could be filed in medical malpractice cases. But the rest of the insurance industry was not protected.

"We're one of six states with third-party bad-faith as a private cause of action, and we have companies that complain about it," Cline said.

Heather Heiskell Jones, executive director of the West Virginia Insurance Federation, said the group's top issue for the legislative session is urging lawmakers to wipe third-party bad-faith lawsuits off the books completely.

"This is really important and would go a long way in terms of getting the Legislature to proactively address issues that are a real disincentive for companies to do business in this state. ... It's a way to avoid a crisis in another line of insurance," Jones said.

Cline said in addition to those kinds of lawsuits, companies have found that in West Virginia, they are being held liable for damages for which they did not feel responsible.