Calif. Proposed Rate Rule Change Draws Fire

A proposed revision in the rules governing California’s insurance rate-setting process has drawn the fire of insurance trade groups, which argue the changes unfairly impact smaller insurers.

That was the thrust of a written argument submitted last week to the California Department of Insurance by the National Association of Mutual Insurance Companies (NAMIC) with its domestic insurer state advocacy partners, the Pacific Association of Domestic Insurance Companies.

Their complaint was voiced concerning amendments to the Prior Approval of Regulation proposed by the department.

“These amendments…are conceptually flawed and unfairly discriminate against small-to-midsize property-casualty insurers in California,” Christian J. Rataj, NAMIC’s Western state affairs manager, said in a statement.

Among the changes to the Prior Approval of Regulation that NAMIC says are “objectionable” is one relating to a proposed Efficiency Standard—a formula used in the rate-making process to determine whether an insurance carrier's rates are reasonable and appropriate.

Mr. Rataj said the department proposes use of a “formulaic insurance industry historic expense average” as a means by which to evaluate the reasonableness of an insurer's business expenses and operating costs.

“The idea that a simple industry average, with a proscribed standard deviation range, could fully and accurately measure the business realities for both national carriers and small-to-midsize insurers is suspect,” he said.

Mr. Rataj said, “National carriers, regional insurers and small-to-midsize domestic insurers all have different organizational structures, marketing approaches and business strategies” that influence an individual insurer’s operating expenses.

Proposed amendments affecting an insurer’s rate of return, NAMIC said, are of particular concern.

Mr. Rataj said those amendments “do not promote financial stability of insurers and/or the economic vitality of the insurance industry. The CDI proposed rate of return will adversely affect the industry’s ability to obtain necessary capital for growth and will ultimately reduce market competition in the state of California.”

NAMIC and PADIC said preventing insurers from making a reasonable rate of return could “devastate California’ economy.”

“California’s financial health is inextricably linked to the vitality of the insurance industry, especially in light of the fact that the insurance industry is one of the largest employers in the state, a leading sourcing of tax revenue [premium taxes] for the state’s budget, and a substantial funding source for state bond projects,” said Mr. Rataj.

According to NAMIC, if the department goes through with the changes, “California insurance consumers and the state’s economy could be severely harmed.”

NAMIC has 106 member insurance carriers writing business in California, which the organization said represents approximately 23 percent of the property-casualty insurance business in the state.

The proposed regulatory change is online at http://www.insurance.ca.gov/0250-insurers/0800-rate-filings/0200-prior-approval-factors/upload/RegFile20080506EFPDatedMay1608.pdf.