Dept. of Business Regulation: Effect of CCFD Receivership on Homeowners Insurance Rates

April 23, 2013

Insurers use the type of fire protection covering a particular home as one factor in determining whether or not the insurer will agree to insure the home (underwriting) and determine the premium that will be charged to the homeowner (rating). The Rhode Island appointed advisory organization, Insurance Services Office (ISO), publishes Public Protection Classifications (PPC) that insurers may use to underwrite and rate homeowners insurance. Insurers are free to use other classifications, however, we believe that the use of ISO PPC classifications is common for most insurers writing in Rhode Island. Insurers will set different standards for what PPC classifications they are willing to write and the effect on rates. Therefore, if a PPC classification deteriorates, a homeowner may be subject to nonrenewal, or will see a premium increase.

PPC classifications are a 1 to 10 scale with 10 meaning that the home is unprotected. An unprotected classification means that the Fire District covering that home has ceased to function and its duties have not been assumed by surrounding communities. A property that is within 5 road miles of the legally-responsible responding fire station and 1000 feet of an approved water source will be assigned the classification of the responding fire district. Under ISO's Fire Suppression Rating Schedule, properties that are within 5 road miles of the legally-responsible responding fire station but beyond 1000 feet of a water source would receive Class 9. Properties beyond 5 road miles from the responding fire station are assigned Class 10, regardless of water source. Although fire protection is only one factor used by insurers in rating and underwriting the lower the PPC number the more beneficial it will be for the homeowner in underwriting and rating by insurers.

The PPC assigned to the Central Coventry Fire District prior to the receivership was 5/9. This means that all homeowners within 5 miles of the fire station and 1000 feet of a water source have a PPC class of 5 and those homeowners beyond 1000 feet of a water source have a classification of 9. No homeowner in the Central Coventry Fire District currently has a classification of 10. Insurers that use ISO's PPC classifications may have pricing associated with each PPC class separately, or in groups of PPC classes. Pricing may be different for commercial risks vs. personal risks. Some insurers may use PPC classification for underwriting decisions. As noted above, not all insurers use ISO's PPC classifications, but may reflect the presence and/or quality of the fire service emergency communication system and available water in other ways in their pricing or underwriting.

Since fire protection is only one factor in determining premium, it is very difficult to quantify the increase in premium that will occur for individual homeowners. The effect will vary with each insurer and insurance policy. However, if the citizens of the Central Coventry Fire District choose to be completely unprotected (PPC 10) we would anticipate that many insurers will cancel or non-renew homeowners policies or that homeowners will experience substantial rate increases. One estimate we were able to obtain was that homeowners could see rates double.

We were able to obtain a few real life examples of what would occur to a homeowner whose insurer did not cancel or nonrenew but rerated the policy based on a new fire protection code. Under the current schedules one insurer informed us that moving from a PPC 5 to a PPC 10 with all other factors remaining unchanged would result in a 50% rate increase. Another insurer indicated that moving from a PPC 5 to a PPC 10 would result in increases ranging from 21% to 33% percent depending upon the value of the dwelling insured under the policy. In terms of actual dollars, the amounts vary according to the value of the property and overall premium, however, we were able to obtain estimates of between $ 277 and $ 795 in annual homeowners premium increases. If a fire district with a lower PPC rating assumes the responsibility for these homes, premium will be effected but to a lesser extent. Should the PPC change to a PPC 8 the premium increase would be between 11% and 17% with the annual dollar impact between $139 and $393.

Should any of the adjacent communities legally assume responsibility for some or all of the former Central Coventry FD areas, those areas could be re-graded in accordance with the rating schedule. On an individual homeowner basis the distance the risk is from the legally-responsible responding fire station and its proximity to an approved water source are very important factors. The situation for Central Coventry is very complex and depends on how fire department, communications and water services are ultimately handled. Underwriting criteria are not filed with the Department and therefore, we cannot predict how many insurers may cancel or nonrenew the policies of Central Coventry residents. If the Court would like additional information on surrounding fire districts and how assumption by those districts may affect homeowners rating, we may be able to obtain more specific information.

Joseph Torti III

Elizabeth Kelleher Dwyer, Esq.