The Personal Insurance Federation of California (PIFC) and the National Association of Independent Insurers (NAII) say they are opposed to a proposal by the California Department of Insurance (CDI) to change the current rate approval system to a “one-size-fits-all” formula.
The two insurance trade organizations, representing insurers that write approximately 70 percent of the personal lines insurance in the State of California, will testify against the proposed regulations at a two-day workshop to be conducted by the CDI on Aug. 22-23, in San Francisco.
“A prior approval ratemaking system has been in existence in California since 1988, when Proposition 103 was passed,” Diane Colborn, vice president of legislative and regulatory affairs for PIFC, said. “Under Proposition 103, insurers present proposed rate changes to the CDI for review and approval. The CDI reviews each rate filing, including expenses, loss ratios and other information presented by the insurer, determines whether the rate change is justified, and either approves or disapproves the rate change.
“The proposed regulations would discard the current individualized rate approval process and install a system that is based on industry averages for expenses, losses and rate of return in each line. The proposed regulations do not take into account differences in company practice, level of service, or market experience,” she added.
NAII western regional vice president Sam Sorich said Dr. Scott E. Harrington, professor of finance and the W. Frank Hipp Professor of Insurance at the Moore School of Business, University of South Carolina, studied CDI’s proposed regulations and found that the “one-size-fits-all” approach to insurance ratemaking is tantamount to placing insurance companies into a public utility style rate of return system that is not in the best interest of California policyholders.
“Dr. Harrington reported that rate regulation should focus on reviewing the rates that an insurer proposes and the insurer’s justifications for those rates. That would recognize market diversity and competition that exists in the marketplace,” Sorich continued.
“Dr. Harrington’s analysis warned that rate reviews that fail to allow sufficient flexibility for insurers to charge rates commensurate with their operations will harm many insurers and their policyholders. The availability and quality of coverage will shrink. In many cases, the adverse effects could fall disproportionately on low-income policyholders,” Sorich said.
“The regulations further propose to limit an insurer’s rate of return to no more than 15 percent and as little as 4 percent on any line of insurance,” Colborn commented. “Caps on rate of return, especially when combined with the other rigid factors in the regulations, will make it very difficult for insurers to be profitable and to attract capital. The end result is companies that offer first rate customer service will be penalized because their costs are above average, and companies that offer less service will be rewarded because their expenses are lower. The proposed regulations will impede the growth of insurance companies, slow introduction of new and broader insurance coverages, and will halt the ability of many companies to do business in California,” Colborn concluded.
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