Tens of thousands of homeowners on Cape Cod were spared a second straight 25 percent increase in insurance premiums after a state regulator yesterday rejected an insurance association's request for double-digit rate hikes.
The FAIR Plan, as the state's insurer of last resort is called, had sought a 25 percent rate hike for Cape Cod and the Islands. Other parts of the state faced double-digit increases, too. The average increase statewide would have been 13.2 percent.
Some 150,000 Massachusetts residents and about 40 percent of homeowners on Cape Cod get their homeowners' insurance from the FAIR Plan, because they are no longer able to obtain affordable coverage in the private market. The number of FAIR Plan policyholders ballooned after insurers pulled out of Cape Cod's market following a spate of hurricanes in Florida and the Gulf Coast in 2004 and 2005.
The FAIR Plan is allowed to submit another request for rate increases. But the tone of insurance Commissioner Nonnie Burnes' decision on the first request indicated the insurer will have to be more persuasive if it asks for another rate increase.
Burnes said that the FAIR Plan failed to prove that "its rate falls within a range of reasonableness and that its proposed rates are not excessive, inad equate, or unfairly discriminatory." The FAIR Plan, she said, "failed to meet its burden on a number of critical fronts."
FAIR Plan president John Golembeski did not return calls seeking comment on the decision.
The commissioner's decision is a welcome development for Cape Cod and Islands homeowners, who had already been socked with a 25 percent hike in their 2006 premiums. If the FAIR Plan's request had been approved, premiums for policies on Cape Cod would have risen to $2,282, on average, from $1,826 currently, and $1,432 in 2005.
The average statewide premium would have risen to $2,007, from $1,606 currently, and $1,324 in 2005.
Cape Cod homeowners were vocal opponents of the FAIR Plan's rate proposal and lobbied the state Legislature to increase regulation to prevent skyrocketing rates.
"I was pleased the commissioner came out with this decision, and I feel she has done a very thorough job," said Paula Aschettino, chairwoman of the Cape Cod advocacy group Citizens for Homeowners Insurance Reform.
Another opponent was Attorney General Martha Coakley, who argued during a nine-month review period, which ended in March, that the insurer based its rates on weather patterns that don't apply to Massachusetts. She said the weather on Cape Cod is milder, making it less at risk of being hit by a Category 4 or 5 hurricane than suggested by the computer models the FAIR Plan used to determine its premiums. The last major hurricane of consequence to hit New England was the so-called Long Island Express in 1938, which had reached Category 3 levels at landfall.
She also said the FAIR Plan's estimate for the cost of reinsurance coverage was "inflated and unnecessary." Insurers said they pulled out of Cape Cod, because hurricanes in the Southeast drove up the cost of reinsurance - back-up coverage that pays claims when a catastrophe occurs.
"We are pleased that the Commissioner agreed that the FAIR Plan rate hike proposal was wrong and unsupported," Coakley said in a statement yesterday.
Stephen D'Amato, a consultant to the Center for Insurance Research in Cambridge, said insurers in Massachusetts typically submit new rate requests after being rejected and he expected the FAIR Plan to do so.
But these are unusual times in Massachusetts' market for homeowners' insurance. For years, the FAIR Plan obtained approval for its rates, with little controversy, after meetings with the attorney general and insurance commissioner.
Then, in 2006, the previous commissioner, Julianne Bowler, rejected the FAIR Plan's rate request but provided the insurer guidance about what an acceptable rate would be. She ultimately approved a 25 percent increase on Cape Cod and a 12.5 percent average increase statewide.
Burnes did not provide similar guidance in her decision. Instead, she criticized the FAIR Plan for seeking another large rate hike so soon after the 2006 increase. She also said the insurer submitted its request before it had enough data to support the higher premiums.
For example, she said, the FAIR Plan did not use up-to-date information on claims cost. The rate request would have been lower had the FAIR Plan used newer data, she said.
Burnes also said the FAIR Plan submitted its request before it had purchased its reinsurance and so did not have a good estimate of how much reinsurance it needed, or how much that would cost.
"We find that it is unreasonable to include in a rate a value for reinsurance that is not based on the actual costs" of reinsurance for the period covered by the filing, the decision said.
Kimberly Blanton can be reached at firstname.lastname@example.org.