STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA BANKERS ASSOCIATION, )

)

Petitioner, )

)

vs. ) CASE NO. 91-3790RX

) CASE NO. 91-6026RX

DEPARTMENT OF INSURANCE, )

)

Respondent. )

) FLORIDA AUTOMOBILE DEALERS, )

)

Petitioner, )

)

vs. ) CASE NO. 91-3811RX

) CASE NO. 91-6027RX

DEPARTMENT OF INSURANCE, )

)

Respondent. )

) CONSUMER CREDIT INSURANCE )

ASSOCIATION, )

)

Petitioner, )

)

vs. ) CASE NO. 91-8103RX

)

DEPARTMENT OF INSURANCE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, William F. Quattlebaum, held a formal hearing in the above-styled case on March 5-6, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner Florida Bankers Association:

J. Thomas Cardwell, Esquire Akerman, Senterfitt & Eidson

P. O. Box 231 Orlando, FL 32802

For Petitioners Florida Automobile Dealers Association and Florida Recreational Vehicle Trade Association:

William C. Owen, Esquire

Martha Harrell Chumbler, Esquire Carlton, Fields, Ward, Emmanuel,

Smith & Cutler, P.A.

P. O. Drawer 190 Tallahassee, FL 32302

For Petitioner/Intervenor Consumer Credit Insurance Association:

C. Timothy Gray, Esquire

Katz, Kutter, Haigler, Alderman, Davis, Marks & Rutledge

106 East College Avenue, Suite 1200 Tallahassee, FL 32301

For Respondent Department of Insurance: William O'Neil, Esq.

Dennis Silverman, Esq.

Andrew Kenneth Levine, Esquire Department of Insurance Division of Legal Services

412 Larson Building Tallahassee, FL 32399-0300

STATEMENT OF THE ISSUE

Whether proposed amendments to Rule 4-7.009, Florida Administrative Code, constitute an invalid exercise of delegated legislative authority. Specifically at issue in this proceeding are the proposed amendments to Rule 4-7.009 which restrict, under certain circumstances, compensation paid to sellers of credit insurance products and which require premium refunds to some purchasers of credit insurance.

PRELIMINARY STATEMENT

On May 31, 1991, the Florida Department of Insurance ("Department") published proposed amendments to certain administrative rules relating to credit life and disability insurance. On June 20, 1991, the Florida Bankers Association ("FBA") and the Florida Automobile Dealers Association ("FADA") filed petitions challenging the validity of the amendments to the rules (DOAH cases numbered 91-3790RX and 91-3811RX, respectively).

On August 30, 1991, the Department published notice in the Florida Administrative Weekly of revision of the proposed amendments to Rule 4-7.009. The FBA filed a petition challenging the validity of the proposed rule amendment (DOAH Case No. 91-6026RX). The FADA and the Florida Recreational Vehicle Dealers Trade Association ("FRVDTA") also petitioned to challenge the proposed rule amendment (DOAH Case No. 91-6027RX).

On August 31, 1991, the Florida Recreational Vehicle Trade Association was granted leave to intervene in DOAH Case No. 91-3811RX. On October 23, 1991, all pending cases were consolidated.

On November 27, 1991, the Department published notice in the Florida Administrative Weekly of further revision to the proposed amendment of Rule 4- 7.009.

On December 3, 1991, the Consumer Credit Insurance Association ("CCIA") was granted leave to intervene in the consolidated cases. On December 18, 1991, the CCIA filed a petition challenging the validity of the November 27 revision. (DOAH Case No. 91-8103RX) On January 8, 1992, this case was consolidated with the four previously consolidated cases.

At the hearing, Petitioner FBA presented the testimony of Gary Fagg, James Slater, Carol Ostapchuk and Bruce Lindsay. Petitioners FADA/FRVDTA jointly presented the testimony of David Jeffries and Charles Johnson and had one exhibit admitted into evidence. Petitioner/Intervenor CCIA presented the testimony of Joseph Warnock, Arthur Fagg, Brian Staub and William Burfeind, and had eight exhibits admitted into evidence. The Department presented the testimony of Michael Francis and had fourteen exhibits admitted into evidence.

The transcript was filed on March 20, 1992. Proposed final orders were filed, by agreement of the parties, on April 13, 1992. The proposed orders were carefully considered in the preparation of this Final Order. The proposed findings of fact are ruled upon in the Appendix which is attached and hereby made a part of this Final Order.

FINDINGS OF FACT

1. Credit insurance is a form of group insurance marketed and sold to consumers by creditors or, in the case of motor vehicle financing, by vehicle dealers. The insurance can be purchased by a debtor at the time the debtor enters into a loan agreement.

   
   

2. Credit insurance is purchased by debtors as protection against risk of loss caused by unexpected events occurring during the term of the insurance contract. Credit insurance provides for the payment of the balance of the debt upon the death or disability of the insured debtor. Otherwise stated, the benefit of such insurance to the debtor is the assurance that, if the debtor becomes unable, due to death or disability, to make the required periodic payments, the insurer will pay off the balance of a loan or other debt obligation.

   
   

3. Sellers of credit insurance products are compensated in the form of commissions paid to sellers by insurers. Additional compensation is periodically paid by some insurers to sellers based upon the profitability of each seller's line of business.

   
   

4. Beginning in late 1990, the Department of Insurance ("Department") proposed amendments to administrative rules relating to credit life and credit health and accident insurance products. The Petitioners have challenged the provisions of the proposed rule restricting the level of compensation paid to the sellers of credit insurance products and requiring insurers to make "experience refunds".

   
   

5. As set forth in the Department's Notice of Change, published in the November 27, 1991 edition of the Florida Administrative Weekly (Vol. 17, No. 48), the proposed rule amendment provides in relevant part as follows:

   4-7.009 Determination of Reasonableness of Benefits in Relation to Premium Charge

   1. General Standard. Under the Credit Insurance Law, benefits provided by credit insurance policies must be reasonable in relation to the premium charged. In determining whether benefits are reasonable in relation to premium, the Department shall consider loss experience, allocation of expenses, risk and contingency margins, and policy acquisition costs.

      This requirement is satisfied if

      1. the premium rate charged develops or may be reasonably expected to develop a loss ratio of not less than 1. (a) 55% for credit life insurance and 2. (b) 50% for credit accident and health insurance, and either

      2. the insurer does not pay compensation in excess of 30% of the net direct written premium based upon the applicable prima facie rates set forth in Rules 4-7.010 and 4-7.011, or

      3. the insurer demonstrates to the satisfaction of the Department that payment of compensation in excess of said 30% is actuarially sound. "Compensation" means money or anything else of value paid by the insurer and/or by any reinsurer to any agent, producer, creditor, or affiliated body.

   2. On the basis of relevant experience, uUse of rates not greater than those contained in Rules 4-7.010 and

      4-7.011 ("prima facie rates") shall be deemed currently reasonable premium rates reasonably expected to develope the required loss ratio, subject to a later determination of experience refunds, if any, as described herein. An insurer may only file and use rates with such forms which are greater than the prima facie rates set forth in Rules 4-7.010 and 4-7.011 upon a satisfactory showing to the Department Commissioner that the use of such rates will not result on a statewide basis for that insurer of a ratio of claims incurred to premiums earned of less than the required loss ratio. Furthermore, the extent to which an actual rate is greater than that set forth may not exceed the difference between (a) claims which may be reasonably expected and (b) the product of the required loss ratio and the prima facie rates set forth in Rules 4-7.010 and 4-7.011 for the coverage being provided.

   3. (2) The Department Commissioner shall, on a triennial basis, review the loss ratio standards set forth in subsection (1), above, and the prima facie rates set forth in Rules 4-7.010 and 4-7.011 and determine therefrom the rate of expected claims on a statewide basis, compare such rate of expected claims with the rate of claims for the preceding triennium, determined from the incurred claims and earned premiums at prima facie rates reported in the annual statement supplement, and adopt the adjusted actual new statewide prima facie rates for Rules 4-7.010 and 4-7.011 to be used by insurers during the next triennium. The new rates will be set at levels that would have produced

      the loss ratios set forth in subsection (1), above. To make this comparison and redetermination, insurers shall report in the annual statement supplement format, each year, claims and earned premiums, separately, for business written with premiums based on Rules 4-7.010 and 4-7.011.

      * * *

      1. Insurers will calculate a dollar amount of loading each year based upon the insurer's earned credit life and credit accident and health premium in this state for the same year. Loading will be calculated as 45% of earned premium for life insurance and 50% of earned premium for credit accident and health insurance. For this calculation, earned premium shall be based on the rates set forth in Rules 4-7.010 and 4-7.011.

      2. Insurers shall calculate an Experience Refund Amount each year for credit life and credit accident and health insurance written in this state after the effective date of this rule. Experience Refunds can be positive or negative. Positive Experience Refunds are to be refunded in the following manner:

      1. Experience refunds are to be allocated to accounts which have positive Experience Refund Amounts in proportion to the ratio of each account's refund amount to the total of all positive refund amounts. For the purpose of this allocation, all individual policies are to be treated as one account.

      2. The Experience Refund Amount allocated to a particular account is to be refunded to all certificate holders or individual policyholders of such account in proportion to the premiums earned for each certificate holder or individual policyholder to the total of all premiums earned for such account. Earned premiums for Experience Refund purposes are to be equal to paid premiums for the calendar year less unearned premium reserves at the end of the calendar year plus unearned premiums at the beginning of the calendar year. Unearned premium reserves are to be calculated pro rata.

      3. Credit policies issued on a non-contributory basis are excluded. Non-contributory means that individual insureds pay no part of the insurance premium.

         Premiums are paid by the policyholder out of policyholder funds.

      4. Individual credit policies issued on a participating basis are to be excluded.

      5. All new loans insured after the effective date of this rule are subject to the Experience Refund calculation and distribution, if any.

      6. Individual refunds of less than $10 do not have to be made.

      7. Experience Refunds are to be determined for each calendar year as follows:

         1. Earned Premium, less

         2. Loading as determined above, less

         3. Incurred claims, less

         4. The sum of any carry forwards for the three previous years.

      8. An insurer that uses rates which are 10% or more below the rates set forth in Rules 4-7.010 and 4-7.011 shall not be required to calculate or make an Experience Refund.

      
      

6. The Florida Bankers Association ("FBA") is the trade association of the Florida banking industry, many of whom sell credit insurance to their customers.

   
   

7. The Florida Automobile Dealers Association ("FADA") is a trade association of franchised new car and truck dealers, approximately 65% of whom sell credit insurance.

   
   

8. The Florida Recreational Vehicle Dealers Trade Association ("FRVDTA") is a trade association of recreational vehicle dealers, approximately 35% of whom sell credit insurance.

   
   

9. The FBA, the FADA, and the FRVDTA are substantially affected by the proposed rule amendment at issue in this case. Specifically the FBA, the FADA, and the FRVDTA are substantially affected by the proposed regulation of compensation paid to sellers of credit insurance products and by the proposed requirement that, under some circumstances, refunds be made to credit insurance purchasers.

   
   

10. The Consumer Credit Insurance Association ("CCIA") is a trade association of credit insurance companies, at least 50 of whom sell credit insurance in Florida. The CCIA is substantially affected by the proposed rule amendment provision related to premium refunds to some insureds.

    
    

11. Credit insurance is priced and sold without regard to sex or age of the debtor. There is little underwriting of credit insurance risks. Due primarily to the age of the population and the effect of mandated coverages, Florida's credit insurance claims are higher than in other states. There are currently in excess of eighty million credit insurance policies in force in the United States.

    
    

12. Credit insurance is sold under master policies issued by insurers to producers, such as banks and vehicle dealers. Producers sell the insurance product and maintain records of the credit insurance purchasers, who hold certificates issued under each master policy.

    
    

13. Credit insurance premiums are based upon the amount financed by the debtor and are calculated according to rates established on a statewide basis by the Department. Credit insurers may not charge more than the prima facie rates for credit insurance, therefore, there is no benefit to consumers to "shop around" for credit insurance. Although credit insurers are not prohibited from charging less than the prima facie rates, there is no evidence that any insurer charges less than the Department's adopted rates.

    
    

14. Since 1982, the Department-approved prima facie credit life premium rate was $.60 for every $100 financed. The rate was based on the Department's determination that a $.60 prima facie rate would result in insurers paying out approximately 60% of premium dollars in claims paid to insureds, and that a 60% "loss ratio" was reasonable. The "loss ratio" is the fraction of premium dollars paid out in claims.

15. The $.60 prima facie rate did not yield a 60% loss ratio. The loss ratios for some insurers was substantially less that 60%.

    
    

16. On September 1, 1991, the Department reduced the prima facie credit life and credit health and accident rates. In establishing new prima facie rates, the Department established a 55% loss ratio for credit life insurance and a 50% loss ratio for credit disability.

    
    

17. The revised prima facie rates are based upon data from calendar years 1986, 1987 and 1988. Such data includes information related to paid claims, earned premium, and insurer administrative overhead expenses. The setting of such rates is an actuarial exercise intended to provide a reasonable projection of premium rates and loss ratios.

    
    

18. There is no evidence that the revised prima facie rates result in premiums which are excessive in relationship to the amount of the loans insured. The revised prima facie rates are reasonably expected to yield the revised loss ratios.

    
    

19. The rule provides a triennial review mechanism to ascertain whether the expected loss ratios are being met and to adjust prima facie rates if such is indicated. The review is a reasonable method of assuring that such loss ratios are met.

    
    

20. Currently, commissions are paid by insurers to producers (i.e. banks and dealers) as compensation for selling the product. The amount of commission is determined by agreement between the insurer and producer. Commissions for the sale of credit insurance vary widely and, in some cases (generally involving the sale of credit insurance related to automobile purchases) may be as high as 60% of the premium paid by the consumer. In addition to payment of commissions, some insurers retrospectively compensate producers by periodically paying an amount based upon the profitability of each producer's business. Compensation levels largely determine which credit insurer's product a producer chooses to sell.

    
    

21. The proposed rule limits total compensation levels, absent specific authorization by the Department, to 30% of the net direct written premium based upon the applicable prima facie rates.

    
    

22. Compensation levels have no impact on the premiums charged to consumers purchasing credit insurance. Premiums charged are based on the Department's prima facie rates.

    
    

23. The proposed rule permits a credit insurance company to exceed the 30% compensation restriction where the insurer can establish that the payment of compensation in excess of the 30% is "actuarially sound".

    
    

24. The determination of whether payment of commission in excess of 30% is "actuarially sound" is left to the discretion of the Department. There is no statutory, rule, or commonly accepted definition of the term, although the Department's actuary stated that a product determined to be "actuarially sound" would be a "self-supporting" product, either profitable or "breaking even". He further opined that he would consider investment income in a determination of actuarial soundness, although the proposed rule does not require such consideration.

25. The Department's purpose in enacting the proposed compensation restriction was to protect insurers from insolvency and financial instability. The commission restriction was not designed to protect against excessive charges in relation to the amount of the loan, duplication or overlapping of insurance, or the loss of a borrower's funds by short term cancellation of a policy. The commission restriction was not intended to, and will not, ensure that the loss ratios deemed reasonable by the Department will be met.

    
    

26. In adopting a 30% compensation restriction, the Department calculated that, assuming the 55% loss ratio was met, $.55 of each premium dollar would be paid in claims. The Department assumed that $.15 of each premium dollar would cover overhead expenses and profit. According to the Department, the remaining

    $.30 is the most an insurer could pay as compensation to the producers without affecting the solvency of the insurer. In calculating the commission restriction, the Department did not consider the effect of an insurer's investment income on the ability to pay commission.

    
    

27. There is no evidence that payment of commissions in excess of 30% of net direct written premiums has adversely affected the solvency of any credit insurer doing business in Florida. There is, in fact, no history of credit insurer insolvency in Florida.

    
    

28. Nationwide, there has been little problem of insolvency in the credit insurer business, with no more than four insurers having become insolvent. In each of those cases, the insolvency resulted from poor management of assets, and was not related to payment of excess commissions to producers.

    
    

29. The Department asserts that, absent such restrictions, insurers will pay excessive compensation in order to compete for producers, and that such excess compensation, coupled with administrative expenses and a 55% loss ratio, will threaten the solvency of the companies. The assertion is not supported by the greater weight of credible evidence.

    
    

30. The proposed rule also requires insurers, under some circumstances, to make experience-based refunds to credit insurance purchasers.

    
    

31. In determining whether a refund is required, an insurer first calculates whether the insurer has met or exceeded the 55% loss ratio for the prior year. If the loss ratio is met or exceeded, no refunds are required.

    
    

32. If an insurer determines that the 55% loss ratio was not met, the insurer calculates the difference between targeted 55% loss ratio and the actual percentage of premium dollars paid out in claims. The insurer then identifies each producer account which had a loss ratio of less than 55%, determines the identity and location of each certificate holder (insured) in each producer's account, and makes a refund to each identified certificate holder. Individual refunds of less than $10 to an individual consumer are not required.

    
    

33. The proposed rule permits insurers to carry excess losses forward for a period of three year, to offset years when the targeted loss ratio is not met. However, such excess losses may not be carried forward beyond the three year period.

    
    

34. Whether a consumer receives a refund is unrelated to the premium paid by the consumer. An individual consumer ("A") purchasing a car and credit insurance at Dealer "A" may receive a refund, while a Consumer "B" purchasing the same car and credit insurance from Dealer "B" may not receive a refund, if

    Dealer A's line of business with the insurer meets the target loss ratio and Dealer B's line of business with the same insurer fails to meet the loss ratio.

    
    

35. The benefit of the credit insurance is the assurance that, under certain conditions, the insurer will pay off the balance of a loan or other debt obligation. If Consumer A receives a refund and Consumer B does not, Consumer A pays more than Consumer B for the same insurance protection.

    
    

36. The Department's purpose in enacting the proposed experience refund was to ensure that the 55% loss ratio would be met. However, the experience refund provision, combined with the three year limit for charging off excess losses, will eventually result in loss ratios which will exceed the 55% ratio which the Department has determined to be reasonable.

    
    

37. There is no need for experience refunds when the prima facie rates established by the Department are appropriately set. Such rates are designed to produce an acceptable loss ratio. It is reasonable to believe that the Department's revised prima facie rates will result in acceptable loss ratios.

    
    

38. The refund proposal was not designed to protect against excessive charges in relation to the amount of the loan, duplication or overlapping of insurance, or the loss of a borrower's funds by short term cancellation of a policy.

    
    

39. The proposed rule provides that an insurer charging a premium based on rates at least 10% below the prima facie rates are not required to calculate the experience refund. There is no credible rationale supporting the use of 10% as the threshold under which an insurer escapes the refund calculation, although the resulting loss ratio likely approaches the 60% loss ratio suggested by the National Association of Insurance Commissioners.

    
    

40. Of the actuaries testifying at hearing, one opined that a rate 10% less than the prima facie rate was viable, the other opined that it was not. Because the Department's revised prima facie rates are reasonably calculated to result in a 55% loss ratio, an insurer charging less than the prima facie rate will likely exceed the 55% loss ratio.

    
    

41. In connection with the final version of the proposed rule, the Department did not prepare an economic impact statement. The Department did not estimate the costs of insurer compliance with the refund provisions.

    
    

42. The expense required of insurers in order to establish experience refund payment systems is significant. Information management systems will require extensive modification to permit such data to be maintained.

    Substantial amounts of data, which is not currently provided to insurers, must be collected and accurately maintained to permit refunds to be made. Such costs were not included in administrative expenses considered by the Department when the revised prima facie rates were established.

    
    

43. Presently, credit insurers maintain limited data related to insureds purchasing credit insurance in connection with installment loans. Although such data may be initially collected by producers, insurers are typically provided only with the name of the debtor and loan number. Data is transmitted to insurers either electronically or through paper files. In either case, data must be converted to usable form by insurers.

44. In approximately seventy percent of credit insurance business, addresses of insureds are not transmitted to insurers. There is no credible evidence that current addresses of insureds are continuously maintained by either insurer or producer in installment debt insurance, since there is little need to question original data as long as periodic payments are being timely made.

    
    

45. In a form of credit insurance known as "monthly outstanding balance" insurance, bulk accounts are received by insurers, who generally does not receive either names or addresses of insureds. Consumers whose monthly outstanding balance indebtedness is insured are more likely to provide producer/creditors with current addresses, but such data is not provided to insurers.

    
    

46. As to credit insurers, although most insurers currently process refund checks, the additional expense of establishing or modifying systems capable of compliance with the proposed refund requirement could amount to as much as five percent of each premium dollar.

    
    

47. One bank official estimated that, as to his bank, the expense of complying with the refund provisions would include an initial cost of $1.1 million and an annual cost of $350,000 to $500,000. A credit insurance information systems and processing executive estimated that the 31 producers writing business for his company would incur costs of $1,860,000 to comply with the rule, and that his own company's costs would be in the range of $4-5 million.

    
    

48. The Department suggested that, rather than modify existing mainframe computer systems, such data could be maintained by insurers on personal computers and microcomputer networks. The Department asserted that such systems would be less expensive and require less modification than the process outlined by industry representatives. However, there is credible testimony establishing that significant resources would be involved in determining whether such conversion to microcomputers would be feasible or warranted. In any event, there is no evidence that such conversion could be accomplished in a timely manner permitting the insurers to comply with the proposed rule requirements.

    
    

49. The greater weight of the evidence establishes that the expenses estimated by the industry representatives are reasonable based upon the existing management information systems maintained by the industry.

    
    

    CONCLUSIONS OF LAW

    
    

50. The Division of Administrative Hearings has jurisdiction over the parties to and subject matter of this proceeding. Section 120.56, Florida Statutes. The evidence establishes that the Petitioners are substantially affected by the proposed rule amendments at issue in this proceeding and have standing to challenge the amendments on behalf of their members.

    
    

51. As stated at section 120.52(8), Florida Statutes, a proposed or existing rule is an invalid exercise of delegated legislative authority if any one or more of the following apply:

    
    

    1. The agency has materially failed to follow the applicable rulemaking procedures set forth in s. 120.54

    2. The agency has exceeded its grant of rulemaking authority, citation to which is required by s. 120.54(7);

    3. The rule enlarges, modifies, or contravenes the specific provisions of law implemented, citation to which is required by s. 120.54(7);

    4. The rule is vague, fails to establish adequate standards for agency decisions, or vests unbridled discretion in the agency; or

    5. The rule is arbitrary or capricious.

    
    

52. The Department asserts that the commission restrictions imposed by the proposed rule are required to assure the fiscal stability of credit insurers allegedly unable to adjust operations to reduced premium rates and increased loss ratios. The experience refund provisions are allegedly designed to enforce loss ratios and to assure that consumers receive reasonable benefits in relation to the premiums charged. However, the issue in this case is, not whether the Department's initiative related to credit insurance is appropriate or well- intentioned, but whether the rule provisions challenged by the Petitioners constitute an invalid exercise of delegated legislative authority. The burden of proof falls to the Petitioners to establish that the rule is an invalid exercise of delegated legislative authority. As to the proposed amendments at issue, the burden has been met.

    
    

53. The proposed rule amendment exceeds the Department's grant of rulemaking authority. As specific authority for the rule, the Department, in the Notice of Change published in the November 27, 1991 edition of the Florida Administrative Weekly (Vol. 17, No. 48), cites Sections 624.308(1) and 627.678, Florida Statutes.

    
    

54. Section 624.308(1), Florida Statutes, is a general grant of authority to the Department which provides as follows:

    
    

    1. The department may adopt reasonable rules necessary to effect any of the statutory duties of the department. Such rules shall not extend, modify or conflict with any law of this state or the reasonable implication of such laws.

       
       

55. The general grant of rulemaking authority provides only that the Department may enact rules which do not extend, modify or conflict with other law.

    
    

56. Section 627.678, Florida Statutes, sets forth the Department's authority to establish rules specifically related to credit insurance. The section provides:

    
    

    1. For the effective protection of the public interest, the department shall have the full power and authority to adopt, promulgate, and enforce separate rules pertaining to issuance and use of each type of credit insurance defined in s. 627.677.

    2. Rules made pursuant to this section shall be principally designed, and shall be promulgated with the purpose of protecting the borrower from excessive charges by or collected through the lender for insurance in relation to the amount of the loan, to

       avoid duplication or overlapping of insurance coverage and to avoid loss of the borrower's funds by short rate cancellation or termination of such insurance.

       However, nothing in such rules shall be construed to authorize the department to prohibit operation of normal dividend distributions under participating insurance contracts. (emphasis supplied)

       
       

57. The proposed rule amendment in this case was not designed with the purpose of protecting the borrower from excessive charges by or collected through the lender for insurance in relation to the amount of the loan. Such protection is provided through the Department's establishment of prima facie rates. The proposed rule amendment was not designed to avoid duplication or overlapping of insurance coverage or to avoid loss of the borrower's funds by short rate cancellation or termination of such insurance. Accordingly, the proposed amendment exceeds the Department's grant of rulemaking authority set forth at Sections 624.308(1) and 627.678, Florida Statutes.

    
    

58. The proposed rule amendment enlarges, modifies, or contravenes the specific provisions of law implemented. The November 27, 1991 Notice of Change states that the proposed rule amendment implements Sections 627.410, 627.411, 627.678, 627.6785, and 627.682, Florida Statutes.

    
    

59. Sections 627.410 and 627.411, Florida Statutes, set forth requirements related to filing and approval of insurance forms and are referenced below.

    
    

60. Section 627.678, Florida Statutes, set forth above, provides that related rules must be principally designed and promulgated with the purpose of protecting the borrower from excessive charges by or collected through the lender for insurance in relation to the amount of the loan, to avoid duplication or overlapping of insurance coverage and to avoid loss of the borrower's funds by short rate cancellation or termination of such insurance. The proposed amendment in this case does not protect the borrower from excessive charges for insurance in relation to the amount of the loan, does not avoid duplication or overlapping of insurance coverage and does not avoid loss of the borrower's funds by short rate cancellation or termination of such insurance.

    
    

61. The proposed rule provisions restricting commissions and requiring refunds are not authorized by, and enlarge and modify, the specific grant of authority provided by section 627.678, Florida Statutes.

    
    

62. The proposed rule amendment enlarges and modifies the specific grant of authority of this section 627.6785, Florida Statutes, which provides as follows:

    
    

    1. Credit disability and credit life insurers shall file with the department a copy of all rates and any rate changes used in this state.

    2. No credit disability rate and no credit life rate shall exceed the maximum allowable rate promulgated by the department.

    3. No credit life rate or credit disability rate shall be deemed to comply with the allowable rate criteria contained in this part if it contains age restrictions which make ineligible for credit life those debtors or lessors 70 years of age or under, or for credit disability those debtors or lessors 65 years

       of age or under, at the time the indebtedness is incurred. However, for credit life, the coverage shall be provided, at a minimum, until the earlier of the maturity date of the loan or the loan anniversary at age 71, and for credit disability, the coverage shall be provided, at a minimum, until the earlier of the maturity date of the loan or the loan anniversary at age 66.

       
       

63. Nothing in the preceding section authorizes the adoption of the experience-based refund provision or the compensation restriction included in the proposed amendment.

    
    

64. The proposed rule amendment enlarges and modifies the specific grant of authority of section 627.682, Florida Statutes, which provides:

    
    

    All forms of policies, certificates of insurance, statements of insurance, applications for insurance, binders, endorsements, and riders of credit life or disability insurance delivered or issued in this state shall be filed with and approved by the department before use as provided in ss. 627.410 and 627.411. In addition to grounds as specified in s. 627.411, the department, upon compliance with the procedures set forth in s. 627.410, shall disapprove any such form and may withdraw any previous approval thereof if the benefits provided therein are not reasonable in relation to the premiums charged, or if it contains provisions which are unjust, unfair, inequitable, misleading, or deceptive or which encourage misrepresentation of such policy.

    
    

65. Section 627.682, Florida Statutes, requires the Department to disapprove any insurance form and withdraw any previous approval, if the Department determines that the benefits provided are not reasonable in relation to the premiums charged for the product. Section 627.410, Florida Statutes, provides requirements related to the filing and approval of insurance policy forms by the Department. Section 627.411, Florida Statutes, provides grounds for disapproval of such forms.

    
    

66. The cited sections do not authorize the Department to require insurers to refund premium funds to the customers of a producer in the event that the customers file an insufficient number of claims. The cited sections do not authorize the Department to restrict compensation levels paid to producers of credit insurance business. The Department's responsibility to assure that benefits provided are reasonable in relation to the premiums charged is fulfilled by establishment of prima facie rates. In the event the Department determines that the benefits are not reasonable in relation to the premium charges, the Department is directed to disapprove insurance forms and to withdraw any previous approval, effecting removing the product from the market.

    
    

67. The proposed rule amendment fails to establish adequate standards for the agency's decision related to actuarial soundness of compensation exceeding the 30% threshold. The amendment does not specify what factors would be considered in a determination of actuarial soundness and contains no guidelines for the determination. The Department's current actuary testified that

    investment income could be included, and that he would consider such income, but the proposed rule provides no standards whatsoever for such determination.

    
    

68. The proposed rule provision relating to the experience refund to consumers is arbitrary and capricious. A capricious action is one taken without thought or reason or which is taken irrationally. An arbitrary decision is one that is not supported by facts or logic or that is despotic. Agrico Chemical Company v. Department of Environmental Regulation, 365 So.2d 759 (Fla. 1st DCA 1979).

    
    

69. A typical consumer purchases credit insurance, if at all, from the vehicle dealer or from the creditor. Regardless of where the insurance is purchased, all consumers purchasing credit insurance pay premiums based on rates established by the Department.

    
    

70. The Department asserts that the benefit received by the insured is determined by the total loss ratio for each insurer and producer. The evidence fails to support the assertion. The benefit to each consumer is the protection against risk of loss caused by unexpected events occurring during the term of the insurance contract. Each consumer purchasing credit insurance pays the premium based on the Department's rate and receives the benefit of the protection. Clearly, by operation of the refund requirement, some consumers will pay less than other consumers for identical protection. The refund provision is illogical, arbitrary and capricious.

    
    

71. In failing to prepare an economic impact statement, the Department materially failed to follow the applicable rulemaking procedures set forth at s. 120.54, Florida Statutes.

    
    

72. Economic impact statements were prepared for previous proposed versions of the rule, however, these versions did not include the proposed experience refund requirement, which clearly and significantly impacts the Petitioners in these cases. The Department asserts that the insurance industry failed to respond to requests for such information, and that the agency was therefore unable to provide an impact analysis. However, the Department could have utilized existing information and personnel in order to estimate anticipated expenses involved in implementing the proposed rule requirements, as it did in attempting to refute testimony presented at hearing.

    
    

73. Petitioners FBA, FADA and FRVDTA assert that the proposed regulation of commissions is prohibited by Section 627.684, Florida Statutes, which provides:

    
    

    The premium or cost of credit life or disability insurance, when written by or through any lender or other creditor, its affiliate or associate or subsidiary, or a director, officer, or employee of any of them shall not be deemed as interest or charges or consideration or an amount in excess of permitted charges in connection with the loan or credit transaction; and any gain or advantage to any lender or other creditor, its affiliate, associate, or subsidiary, or a director, officer, or employee of any of them, arising out of the premium or commission or dividend from the sale or provision of such insurance shall not be deemed a violation of any such law, general or special, civil or criminal, of this state or

    of any rule, regulation, or order issued by any regulatory authority.

    
    

74. To sustain the Petitioner's position on this point requires that the first half of the cited statute (which is one extended sentence) be disregarded. The statute clearly operates to prevent credit insurance premiums from being included in finance charges and violating caps on such interest, and does no more.

ORDER

Based upon the foregoing findings of fact and conclusions of law, it is determined that the proposed amendment restricting producer compensation as set forth at proposed rule 4-7.009(1), Florida Administrative Code, and the proposed amendment requiring experience refunds to insureds as set forth at proposed rule 4-7.009(2) and (6), Florida Administrative Code, constitute an invalid exercise of delegated legislative authority.

DONE and ENTERED this 27th day of May, 1992, in Tallahassee, Florida.

WILLIAM F. QUATTLEBAUM

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 27th day of May, 1992.

APPENDIX TO FINAL ORDER, CASE NOS. 91-3790RX, 91-3811RX, 91-6026RX, 91-6027RX and 91-8103RX

The following constitute rulings on proposed findings of facts submitted by the parties.

Petitioners Florida Bankers Association, Florida Automobile Dealers Association and Florida Recreational Vehicle Dealers Trade Association:

Petitioners Florida Bankers Association, Florida Automobile Dealers Association and Florida Recreational Vehicle Dealers Trade Association filed a joint proposed final order. The proposed findings of fact set forth therein are accepted as modified and incorporated in the Recommended Order except as follows:

17. Rejected, unnecessary.

21. Rejected, irrelevant.

23. Rejected, irrelevant.

Petitioner Consumer Credit Insurance Association:

Petitioner Consumer Credit Insurance Association's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows:

2. Rejected, cumulative.

6. Rejected, cumulative.

1. Rejected, cumulative.

   
   

2. Rejected, unnecessary.

12-19. Rejected, cumulative.

20. Rejected, unnecessary.

21-22. Rejected, unnecessary.

24-25. Rejected, unnecessary.

28. Rejected, unnecessary.

31. Rejected, irrelevant.

37-38. Rejected, cumulative.

1. Rejected, irrelevant.

   
   

2. Rejected, not supported by the weight of persuasive evidence.

   
   

3. Rejected, irrelevant.

   
   

4. Rejected, unnecessary.

43-44. Rejected, not supported by the weight of persuasive evidence.

45. Rejected, irrelevant. Prima facie rates not at issue in this proceeding.

1. Rejected, irrelevant. Prima facie rates not at issue in this proceeding.

   
   

2. Rejected, irrelevant.

1. Rejected, irrelevant.

   
   

2. Rejected, not supported by the weight of persuasive evidence.

57. Rejected, irrelevant.

Respondent Department of Insurance:

Respondent Department of Insurance's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows:

3. Rejected, unnecessary. There is no reason for the general public to "properly evaluate credit insurance prices" which are established by the Respondent.

4-5. Rejected, unnecessary.

1. Rejected, argumentative and not supported by greater weight of the evidence.

   
   

2. Rejected, argumentative and unnecessary.

18. Rejected, not supported by greater weight of the evidence.

1. Rejected, argumentative.

   
   

2. Rejected, unnecessary.

   
   

3. Rejected, argumentative and unnecessary.

23-24. Rejected, unnecessary.

26. Rejected, argumentative. Insurers charged rates set by the Department.

25. Rejected, not supported by greater weight of the evidence.

27-28. Rejected, argumentative and unnecessary.

1. Rejected, not supported by greater weight of the evidence.

   
   

2. Last sentence rejected, argumentative and unnecessary.

   
   

3. Rejected, argumentative.

   
   

4. Rejected, not supported by greater weight of the evidence which establishes only that the testifying actuary would consider investment income in a determination of "actuarial soundness". The proposed rule does not require such consideration. The remainder is rejected as unnecessary argument.

37-38. Rejected, not supported by the greater weight of the evidence which establishes that the current prima facie rate, adopted by the Department, is reasonably expected to result in the loss ratio determined by the Department to be acceptable.

39. Rejected, irrelevant.

40-41. Rejected, not supported by the greater weight of the evidence which establishes that the benefit of credit insurance is the protection against risk of loss caused by unexpected events occurring during the term of the insurance contract.

1. Rejected, irrelevant. Testimony regarding insurer's failure to attain acceptable loss ratios is based on previous prima facie rates. Current prima facie rates have been reduced and are reasonably expected to result in the loss ratio determined by the Department to be acceptable.

   
   

2. Rejected, not supported by the greater weight of the evidence which establishes that the benefit of credit insurance is the protection against risk of loss caused by unexpected events occurring during the term of the insurance contract. There is no evidence that consumers have overpaid for the benefits received. Premiums paid have been based on rates set by the Department.

3. Rejected, not supported by the greater weight of the evidence which establishes that the current prima facie rate, adopted by the Department, is reasonably expected to result in the loss ratio determined by the Department to be acceptable.

   
   

4. Rejected, argumentative and unnecessary.

   
   

5. Rejected, not supported by the greater weight of the evidence.

   
   

6. Rejected, not supported by the greater weight of the evidence.

   
   

7. Rejected, as to the statement "producers would not need to make changes to their present system...," not supported by greater weight of the evidence.

1. Last sentence rejected, irrelevant. At hearing, the Department offered evidence as to fiscal impact of rule provision, therefore the industry's alleged failure to provide such information does not prohibit the Department from estimating fiscal impact.

   
   

2. Rejected, not supported by greater weight of persuasive evidence.

52-53. Rejected, not supported by greater weight of credible. Further, the Department's rationale for the refund provision is to assure that the premium charged is reasonable in relation to benefits received. The benefit received is the protection against risk of loss caused by unexpected events occurring during the term of the insurance contract. All insureds receive the same benefit.

Insureds not receiving refunds pay more for protection identical to insureds receiving refunds. The Department's statement that the "group not receiving a refund is not harmed because they pay no more for insurance" is incorrect.

COPIES FURNISHED:

J. Thomas Cardwell, Esq. Akerman, Senterfitt & Eidson

P. O. Box 231 Orlando, FL 32802

William C. Owen, Esq.

Martha Harrell Chumbler, Esq. Carlton, Fields, Ward, Emmanuel,

Smith & Cutler, P.A.

P. O. Drawer 190 Tallahassee, FL 32302

C. Timothy Gray, Esq.

Katz, Kutter, Haigler, Alderman, Davis, Marks & Rutledge

106 East College Avenue, Suite 1200 Tallahassee, FL 32301

William O'Neil, Esq. Dennis Silverman, Esq. Andrew Kenneth Levine, Esq. Department of Insurance Division of Legal Services

412 Larson Building Tallahassee, FL 32399-0300

Carroll Webb, Executive Director Administrative Procedure Committee

120 Holland Building Tallahassee, FL 32399-1300

NOTICE OF RIGHT TO JUDICIAL REVIEW:

A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO JUDICIAL REVIEW PURSUANT TO SECTION 120.68, FLORIDA STATUTES. REVIEW PROCEEDINGS ARE GOVERNED BY THE FLORIDA RULES OF APPELLATE PROCEDURE. SUCH PROCEEDINGS ARE COMMENCED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF THE DIVISION OF ADMINISTRATIVE HEARINGS AND A SECOND COPY, ACCOMPANIED BY FILING FEES PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL, FIRST DISTRICT, OR WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE PARTY RESIDES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE ORDER TO BE REVIEWED.

Docket for Case No: 91-003790RX

Orders for Case No: 91-003790RX