Less than a month ago, the prospect that long-held principles of actuarial ratemaking would survive an action by the Casualty Actuarial Society board of directors to rescind them seemed like a long shot.
But facing continuing pressure from actuaries representing regulatory agencies and consumer interests, the CAS announced a reversal May 7. The reversal came after the CAS had confirmed the rescission on April 1.
The result is that the “Statement of Principles Regarding Property and Casualty Insurance Ratemaking” is back and available for reference for U.S.-regulated ratemaking, the group said in an announcement.
The reinstatement restores language ratemaking actuaries and regulators have followed for years: “A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expect value of all future costs associated with individual risk transfer.”
According to critics of the CAS rescission attempt, removal of that language created an opening for actuaries to use tools like price optimization that consider consumer shopping activity in setting rates. Critics contend price optimization discriminates against poor people and people of color, who tend to shop around less frequently than wealthier consumers due to potentially fewer market options.
In December 2020, the CAS board had voted to rescind three documents that set forth some of the foundational ideas underlying three key actuarial activities—ratemaking, reserving and valuing insurers—without seeking input from members. Representatives of the Casualty Actuarial and Statistical Task Force of the National Association of Insurance Commissioners (CASTF) and the Consumer Federation of America (CFA) raised questions about the behind-the-scenes withdrawal of all three documents. But it was the rescission of the ratemaking document that got the most attention.
And that’s the one that’s being reinstated.
Ken Williams, staff actuary for the CAS, said regulators moved the needle toward reinstatement with their argument that the Principles provided a concise and understandable explanation of actuarial ratemaking, as opposed to the Actuarial Standards of Practice, which address ratemaking across a number of different documents.
“After conversations with U.S. regulators, there was a much better appreciation for the importance and utilization of the Statement of Principles, which led the board to reinstate them,” he wrote in an email to Carrier Management.
The timing of the move, Williams confirmed, was linked to the fact that members of the NAIC CASTF planned to meet on Tuesday, May 11 with just one item on the agenda—discussion of the rescission of the CAS ratemaking principles. “The [CAS] Board wanted to resolve the issue prior to that meeting,” Williams said.
The meeting agenda posted on the NAIC website indicated that the CASTF members wanted to assess the regulatory implications of the rescission and to “recommend an appropriate remedy.”
According to an April 29 Reuters article, the NAIC was “considering establishing its own set of principles for setting rates for property/casualty insurance.”
Why Did Regulators Care?
The ratemaking SOP, in addition to defining terms like incurred losses, underwriting profit and expenses involved in setting cost-based rates (Section I), discusses “considerations” related to identifying exposure units and relevant data, and concepts like homogeneous groupings for ratemaking accuracy, credibility, loss development and trend factors (Section III).
But the core of the document is Section II—a section clearly titled “Principles”—which includes the words that are ingrained in the minds of ratemaking actuaries and regulators: “A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expect value of all future costs associated with individual risk transfer.”
While “reasonable and not excessive, inadequate, or unfairly discriminatory” are now embedded in the lexicon of P/C insurance regulation, the linkage of final rates to future costs described in that sentence is the critical element that consumer advocates like J. Robert Hunter argued should not be removed. To Hunter, the rescission opened a back door for actuaries to use tools like price optimization that he believes unfairly discriminates against poor people and people of color.
The Road to Reinstatement
Activity leading up to the reinstatement was first reported in Carrier Management. The March 12 Carrier Management article, “Status of Certain Casualty Actuarial Ratemaking, Reserve Principles in Flux,” detailed the specific objections of CASTF and consumer advocates, and reported that the CASTF members had agreed to send a letter to the CAS board urging that the ratemaking principles be reinstated.
In the letter, CASTF members noted that a “generation of actuaries have reviewed, relied upon and cited the ratemaking principles” since their adoption in 1988 but the rescindment “provides the impression that the principles are no longer viewed as valid” by the actuarial profession.
“We find this especially troubling in an environment in which characteristics used by insurers in pricing are being challenged, quite publicly, for their perceived lack of a relationship to risk,” the letter continued.
Even after receiving the CASTF letter, the board stood firm that rescission was appropriate and reaffirmed its decision on April 1. One of the reasons given was the age of the document. Since the late 1980s, a later set of guidelines was developed by a group known as the Actuarial Standards Board, the CAS board noted. These later Actuarial Standards of Practice (ASOPs), overlap the SOPs. Rescinding the SOPs would eliminate confusion between the ASOPs and SOPs, the CAS said.
SOPs, ASOPs and Practice Notes?
Regulatory actuaries and consumer advocates argued that working through numerous ASOPs was a laborious task, compared to referencing the concise ratemaking SOP, a five-page document. And after receiving 16 comments for and against rescission in March, the CAS board reacted initially by conceding that point. While upholding its prior decision to rescind the ratemaking SOP, the CAS board said on April 1 that it was “committed to pursuing development of a document that integrates rating guidance across the relevant ASOPs for actuaries practicing in the United States.”
In addition, the board resolved to formally request that the American Academy of Actuaries develop a practice note on P/C insurance ratemaking to integrate the guidance among the various actuarial standards of practice.
That approach wasn’t exactly welcomed by the American Academy, a member organization for P/C, life, pension and health actuaries. Academy President Tom Campbell responded days later that “the Academy has issued and will continue to produce resources that will be useful to [its] members, the regulatory community, and the public that touch on P/C insurance ratemaking considerations, such as bias in data, assumptions, and models—but that practice notes are ‘not intended to provide interpretations of actuarial standards of practice, nor are they meant to be a codification of generally accepted actuarial practice.'”
What exactly are practice notes and how do they differ from an ASOPs?
“ASOPs set the standard for appropriate practice and are binding on the members of the U.S.-based actuarial organizations when rendering actuarial services in the U.S,” Campbell’s statement said. In contrast, according to a footnote of his statement, the purpose of practice notes “is to provide information to actuaries on current or emerging practices in which their peers are engaged. They are intended to supplement the available actuarial literature, especially where the practices addressed are subject to evolving technology, recently adopted external requirements, or advances in actuarial science and other applicable disciplines.”
The End of a Long Road?
At the May 11 NAIC meeting, which was held in spite of the reinstatement, CAS President Jessica Leong thanked CASTF for its input on the matter, members of CASTF highlighted Hunter’s determination in bringing the rescission to the attention of the committee, and Hunter praised CASTF members for standing up and saying they wanted the principles to be reinstated.
“Regulators standing up strong together are quite powerful….A lot of times regulators are diffuse in their positions….But when they’re together, they have quite a bit of strength. And the insurance industry pays attention,” Hunter said.
For consumers, it’s a win, he said. “We’ve used those four principles in fights with insurance companies over rate filings” over the decades. “They’re very effective,” he said, highlighting, in particular, the principle that ties rates back to actual costs.
At one point, Leong responded to an actuary wanting to understand whether giving a green light to price optimization methods was a motive for the rescission in the first place. “That was never part of the discussion,” she confirmed. “The original discussion, and why this came up was just in effort to clean up shop,” she said. “We felt that it was duplicative with ASOPs, and we didn’t want to have any confusion out there in terms of which one to follow,” she said.
But not every loose end has been tied up. One member suggested that NAIC should still go forward with adopting its own ratemaking statement of principles “that would not be subject to the unilateral decisions of a private organization.”
Another consumer advocate, Birny Birnbaum, director of the Center for Economic Justice, worried that “this episode” in the history of the CAS revealed governance problems for the group. “Had there been a more transparent and inclusive process in the beginning, we wouldn’t have gone through this entire rescission and then reversal,” he said.
Birnbaum suggested that the CAS consider making any activities related to public policy more transparent. A regulatory actuary suggested, however, that this was not a public policy issue, and noted the CAS constitution specifically prohibits members from publicly expressing opinions on matters of public interest on behalf of the society.
For now, the whole matter has been tabled but CASTF leaders said they are open to suggestions about the NAIC to writing its own ratemaking rules.
In reinstating the SOP for reference for U.S.-regulated ratemaking, the board acknowledged that actuarial practices differ around the world and that the concerns raised during this controversy were U.S.-based.
“All CAS members must adhere to regulations and actuarial standards of practice applicable to their jurisdiction, as well as the CAS Code of Conduct,” the board’s May 7 statement said.
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