Insurers Urge Calif. to Drop Proposed Rate of Return Regulations

Three property/casualty insurance trade associations urged the California Department of Insurance (CDI) to abandon proposed regulations that would radically change how the CDI reviews and approves insurance company rate filings.

The three trade associations — Association of California Insurance Companies (ACIC), American Insurance Association (AIA) and Personal Insurance Federation of California (PIFC), objected to the regulations at a CDI hearing today in San Francisco and offered statements that analyzed the regulations from legal, actuarial and economic perspectives.

The three trade associations submitted a statement prepared by Professor J. David Cummins, a professor of insurance at the Wharton School at the University of Pennsylvania. Professor Cummins concluded that the CDI proposed regulations’ estimation of the fair rate of return for insurers is inaccurate and in general will not provide insurers an adequate rate of return commensurate with the risk they bear. Professor Cummins’ statement offers a methodology for determining the fair rate of return that is consistent with modern financial principles, and according to the associations, the CDI failed to follow these principles when it drafted the proposed regulations.

The proposed CDI regulations would judge the rates for all property/casualty insurers by the same standard. “There are hundreds of insurers writing property/casualty insurance in California. These companies offer numerous products that vary in price, service, underwriting and coverages. The proposed regulations ignore these differences and take a ‘one-size-fits-all’ approach to rate regulation. We believe that the proposed regulations would stifle competition and reduce the availability of insurance products for California consumers and businesses,” said Ken Gibson, vice president, western region, of AIA.

Proposition 103, which was approved by California voters in 1988, gives the California Insurance Commissioner the authority to approve property/casualty insurance rates before the rates are put into effect. “Proposition 103 limits the Commissioner’s power to approve or disapprove rates filed by insurers. These proposed regulations go beyond the proposition because they would give the Commissioner the power to dictate or set rates that insurers may charge. That is a power that the voters did not give to the Commissioner,” said Sam Sorich, president of ACIC.

“The US Supreme Court has confirmed that a rate regulatory scheme must give a business the opportunity to cover its operating costs and also to achieve a just and reasonable return. The proposed regulations violate these constitutional standards. The industry-wide averages for losses and expenses in the regulations fail to take into account the characteristics of individual insurers. Moreover, the regulations’ mandated cap on an insurer’s rate of return fails to provide a fair rate of return to insurers writing property/casualty insurance in California,” said Rex Frazier, president of PIFC.

The associations urged the CDI to continue regulatory workshops that will consider alternatives that comply with constitutional standards and California’s statutes on insurance rate regulations.

Source: ACIC, AIA, PIFC