Watford, both of whom were tendered and accepted, without objection, as experts in general actuarial science and property- casualty actuarial science.
The Department introduced 41 exhibits; Exhibit number 34 was admitted over NCCI's objection.
The eight-volume transcript of the hearing was filed on March 11, 2002. Proposed Recommended Orders were filed by the agreed deadline of March 22, 2002.
NCCI is a rating organization within the meaning of Section 627.041(3), Florida Statutes. NCCI is licensed by the Department pursuant to Section 627.221, Florida Statutes, to make rates for workers' compensation insurance, and has been, for decades, the only rating organization licensed to perform this function in Florida. NCCI also acts as the statistical agent for the State. In that capacity, NCCI collects a variety of workers' compensation insurance data from its (approximately
300) member companies, each of which is authorized to provide
workers' compensation insurance in Florida, and reports such data to the Department.
The Department is an agency which generally administers Florida's insurance laws. With respect to workers' compensation insurance, the Department reviews rate filings in accordance with the provisions of Part I, Chapter 627, Florida Statutes, (2001), also known as the Rating Law (Rating Law).
The Consumer Advocate is appointed by the Insurance Commissioner pursuant to Section 627.0613, Florida Statutes, to represent the general public of the state before the Department.
Nature of the Proceedings and Burden of Proof
This is a de novo proceeding to review NCCI's Revised Rate Filing. The burden is upon NCCI to show by a preponderance of the evidence that its Revised Rate Filing would result in rates that are not excessive, inadequate, or unfairly discriminatory within the meaning of Section 627.062(1), Florida Statutes (2001).
Application of the Rating Law
As the issues were refined over the course of the proceedings, there is no dispute as to whether the Revised Rate Filing, if approved, would result in inadequate or unfairly discriminatory rates. It would not. Rather, the dispute concerns whether the Revised Rate Filing would produce rates which are excessive.
The Rating Law governs the process by which premiums for all businesses required to maintain workers' compensation insurance are proposed, and thereafter approved or disapproved by the state. This process is often referred to as ratemaking, and relies heavily upon individuals credentialed in actuarial science (actuaries).
Unlike other types of mathematics, algebra or arithmetic, for example, actuarial science does not purport to be able to come up with one and only one correct answer. Rather, actuaries are statisticians who seek to estimate on a prospective basis insurance rates which fall within a "range of reasonableness."
The range of reasonableness is legally defined to be somewhere between rates that are neither inadequate nor excessive. Put another way, the law recognizes the right of people who invest in the business of providing workers' compensation insurance to receive a fair rate of return on their investments, but the law does not permit a rate of return which is unreasonably high in relation to the risk involved. Actuaries do not contend that there can be only one correct rate at any given time.
Instead, there may be a large area of overlap in the range of reasonableness recognized by different actuaries with respect to the same set of facts. There is substantial
disagreement among actuaries and others as to the central issue in this case---what constitutes an unreasonably high rate of return---and how to draw the line between a reasonable and an unreasonable rate of return.
In part, this is so because actuarial "science" is not science at all: while all practitioners of the science of chemistry agree about the formula by which water is produced, not all actuaries agree about the formula to be applied to various components of the ratemaking process.
The ratemaking process is not like the multiplication tables---it cannot be learned by rote. Ratemaking requires the constant exercise of informed professional judgment.
Actuaries' jobs involve making educated guesses about things which will happen in the future. To take the most basic element of guessing which is unique to workers' compensation ratemaking, actuaries must guess as to how much money will be received as premiums under policies to be written under any given rate filing, and how much money will be paid out in benefits under claims made on these policies.
These and numerous other complex variables are considered in the ratemaking process and have significant impacts upon the range of reasonableness of insurance premiums. Good faith differences of opinion exist, and to a large degree, actuarial judgment is affected by whether, and to what extent, a
particular actuary is employed by insurance companies, or by agencies or businesses with a broader or narrower focus.
A difference of opinion on even one of the factors involved in ratemaking can yield a substantial difference in the premium of a single business from one year to the next. Across the spectrum of businesses which are required to purchase workers' compensation insurance, the difference can amount to millions of dollars.
In its Revised Rate Filing, NCCI sought a premium level increase, made up of individual components which were expressed in the Revised Rate Filing as follows:
Experience, Trend & Benefits 5.4% Experience 1.9%
Trend 2.8%
Benefits 0.7% Total 5.4%
Production and General Expenses 0.8% Production 0.7%
General 0.1% Total 0.8%
Taxes and Assessments 0.1%
Profit and Contingencies 1.6%1
The Rating Law specifies factors and standards to be considered by the Department in deciding whether a rate filing should be approved or disapproved. See Sections 627.062 (2)(b); 627.062(2)(e)(1); and 627.072, Florida Statutes. The factors and standards relevant to the Revised Rate Filing were appropriately taken into account by the Department in its review. In entering its Order on Rate Filing, the Department
had the benefit of evidence in the form of presentations which analyzed relevant statutory criteria, and which were organized along the same lines for the public hearing and for the final hearing in this case. To the extent possible, the undersigned has organized this Recommended Order in a similar format.
The most significant disputes between the parties regarding the factors relevant to the Revised Rate Filing are:
Whether the experience and trend adjustment factors proposed by NCCI, which translate into an overall premium level increase of 1.9% and 2.8%, respectively, are reasonable and would not result in excessive rates.
Whether an overall premium level increase of 0.8% for the production and general expenses component is reasonable and would not result in excessive rates.
Whether an overall premium level increase of 1.6% for the profit and contingencies component is reasonable and would not result in excessive rates.
Other issues were less seriously disputed, or not disputed at all. Both disputed and undisputed issues are, to the extent necessary, addressed separately below.
NCCI's Revised Rate Filing requests an overall premium level increase of 8.0% for the industrial classifications and a 10% overall premium level increase for the federal classifications.2 The federal classifications constitute about
20 of the approximately 600 total classifications. This translates to roughly $20 million of the approximately
$2.7 billion in total workers' compensation premium dollars in Florida, or less than 1% of the market.
Although the parties did not explicitly say so, it is apparent that NCCI almost arbitrarily tacked on an additional 2% upon its proposed industrial class increase, which forms the main focus of the Revised Rate Filing, in order to come up with a proposed figure for the federal classifications. The Department did not object to this procedure from an actuarial science standpoint. Rather, it concedes that if the Department were to approve NCCI's industrial class increase as filed, it would be appropriate to approve the federal classifications increase at the proposed 10% level.
Federal classifications will be treated separately in this Recommended Order.
NCCI's Revised Rate Filing also seeks an increase in the so-called expense constant from $200 to $220. If granted, this translates into an overall premium level offset of 0.1%. In this setting, the expense constant is an amount which NCCI has determined should be collected to cover the expenses of issuing a workers' compensation insurance policy regardless of the type or amount of risk and associated premium collected from employers.
The expense constant is essentially an accounting device which arbitrarily assumes that the overhead associated with getting every piece of new workers' compensation business is identical. Because the expense constant is not intended to result in a premium level increase, NCCI offsets the requested increase in the expense constant against the total premium level increase. After taking into account an offset of 0.1% for the proposed change in the expense constant, the overall net rate level increase requested in the Revised Rate Filing for the industrial classifications is 7.9%.3
NCCI's undisputed evidence supports an increase in expense constant from $200 to $250; however, NCCI seeks to raise the expense constant to a lesser amount, $220.
The unrebutted evidence in this case supports, by a preponderance of the evidence, a finding that an increase in the expense constant as proposed by NCCI is reasonable and does not result in excessive rates.
The manner in which NCCI proposed to spread a premium increase across the hundreds of industrial classifications is not disputed by the Department. Under NCCI's plan, 8% is an overall premium level increase, which means that rates for some types of businesses would go up even higher than 8% over current levels, and rates for other types of businesses would fall.
The crux of the dispute is the reasonableness of certain key components which produce the 8% overall premium level increase. Each of these key components of the Revised Rate Filing is therefore separately considered.
Experience, Trend and Benefits
NCCI filed for an overall premium level increase of 5.4% for the experience, trend and benefits component of the Revised Rate Filing. This is by far the single largest component of the overall 8% increase sought by NCCI in the Revised Rate Filing.
Before the Department and in these proceedings, NCCI sought to prove that a 5.4% increase over current rates was required, as of January 1, 2002, to produce enough premiums from policies issued on or after that date to cover the reasonably expected cost of claims arising under those policies.
After careful consideration of the testimony of all of the expert actuaries and economists who testified on behalf of the parties, the documents relied upon by these experts, and numerous other documents in the record, including, but not limited to, deposition testimony and interrogatories, documents and exhibits introduced at the final hearing, the undersigned concludes that a preponderance of the evidence does not support a finding that the 5.4% increase sought by NCCI under the
category of experience, trend, and benefits is reasonable and would not result in excessive rates.
Part of NCCI's failure of proof relates to the method by which the so-called trend adjustment is computed. The ratemaking process seeks to address what is known as loss development, an essential component to forecasting trend.4
The process by which premiums and losses are properly adjusted, in actuarial terms, requires that they first be "brought on-level" with current rates and benefit levels; then the losses are developed to what actuaries call an "ultimate level." The manner in which this calculation was achieved was a disputed issue between the parties.
The Department rejected NCCI's methodology in its Order on Rate Filing, principally because NCCI, for the first time in 20 years,5 elected to compute loss development factors by calculating the average change in the loss reports for the most recent three years for which data was available.
Previously NCCI had used a two-year average in computing loss development factors in its annual rate filings. By using a three-year average for the nineteenth ultimate loss development factor (also referred to as the tail factor) in the Revised Rate Filing, NCCI achieves a tail factor which drives the rate increase substantially upward, an approach which the Department disapproved.
Considering the entire record, including the credentials, professional history, demeanor of the witnesses while testifying on this and other factors of the parties' disputes over various aspects of the rate-making process, together with the exhibits and prior testimony related to this issue, the undersigned is of the view that NCCI has failed to sustain its burden to prove by a preponderance of the evidence that its methodology in calculating the tail factor, as applied to this Revised Rate Filing, has been adequately justified so as to prove by a preponderance of the evidence that it is reasonable and will not produce rates which are excessive.
Trend Adjustment
After adjusting the 1999 and 2000 calendar-accident year data to the current level of premiums and benefits, and then developing those losses to an ultimate level, the final adjustment which NCCI made to the loss experience data was to apply a trend analysis to account for expected changes in premiums and benefits from the experience period to the forecast period, which begins January 1, 2002. In so doing, NCCI argues for a trend factor of 1% in the experience, trend and benefits component of the Revised Rate Filing. The trend factor which has been approved by the Department for rates currently in effect is 0.5%, so the Revised Rate Filing seeks an additional
0.5% for the trend factor. At a trend factor of 1%, the Revised Rate Filing produces an overall premium level increase of 2.8%.
The purpose of trending analysis is described in the Revised Rate Filing as follows:
As noted above, the filing relies primarily on the experience from calendar- accident years 2000 and 1999. However, the proposed rates are intended for use with policies with effective dates starting on January 1, 2002. It is necessary to use trend factors that forecast how much the future of Florida workers' compensation experience will differ from the past. These trend factors measure anticipated changes in the amount of indemnity and medical benefits as compared to anticipated changes in the amount of workers' wages. For example, if benefit costs are expected to grow faster than wages, then a trend factor greater than zero should be applied. Conversely, if wages are expected to grow faster than benefit costs, then a trend factor less than zero is indicated.
(Petitioner's Exhibit 1, p. 4).
Upon consideration of the entire record as it relates to trend, which includes, but is not limited to, consideration of the expert testimony on same, including the credentials and demeanor of the experts who testified concerning these matters, (including their expectations with respect to inflationary pressures; changes in the frequency of claims; changes in the severity of claims; availability of indemnity awards; and types of medical services being provided and expected to be provided in the future) as well as the numerous exhibits relating to
trend, and in particular Petitioner's evidence and arguments concerning "Florida Total Loss Ratio,"6 the undersigned is of the view that these elements of the record, singly or in combination, are insufficient to tilt the balance in favor of the 1% trend factor NCCI seeks. They do, however, establish by a preponderance of the evidence that the current trend factor of
.5% is justified.
While the Department presented some evidence that a flat trend, or even a slightly negative trend, could be actuarially supported, the Department's evidence was insufficient to overcome NCCI's proof that the current trend factor is reasonable given the currently verifiable measures of claim frequency and claim severity.
Change in the Medical Fee Schedule (Benefits)
The Revised Rate Filing seeks an overall premium level increase of 0.7% as the result of a change in the Medical Fee Schedule.
In general, the Medical Fee Schedule provides limits upon the amounts at which physicians and medical providers may be reimbursed for specific procedures and services performed for workers' compensation insurance claimants.
Following the original Rate Filing, a statutorily- created entity known as the Three Member Panel7 voted in favor of changes in the Medical Fee Schedule. NCCI was aware of the
exact nature of the proposed changes, which had been under consideration for some period of time prior to the Revised Rate Filing. Similarly, the Three Member Panel was aware, at the time the changes were approved, that NCCI had reasonably concluded that the impact of adopting such changes upon workers' compensation insurance rates would be an overall increase of 0.7%.
In its Order on Rate Filing, the Department disapproved NCCI's request for the 0.7% premium level increase for the change in the Medical Fee Schedule, citing a report by the Workers' Compensation Research Institute (WCRI) entitled Benchmarking Florida Workers' Compensation Medical Fee Schedules.
The WCRI report estimated that the impact of the change in the fee schedule will be a decrease of 2% in the provider fees, a decrease which should yield a decrease in rates of 0.6%.
However, by the time of the final hearing in this case, WCRI had retracted its report as follows:
The Flash Report [initial WCRI report] concluded that the proposed new Florida fee schedule would have little impact on overall costs estimated to be a reduction of 2 percent. This finding remains that the new fee schedule would have little impact on overall costs, but the estimate is revised to be an increase of 2.9 percent.
There was unrebutted evidence that the WCRI's revised estimate would in fact support an overall premium level increase of 0.8%, as opposed to the 0.7% increase requested by NCCI in the Revised Rate Filing. However, the WCRI report was not relied upon by NCCI in the Revised Rate Filing and it is not an appropriate subject for fact-finding in this forum.
Instead, the undersigned finds that NCCI has demonstrated that its request for a 0.7% increase based solely upon the change in the Medical Fee Schedule is justified by a preponderance of the evidence and will not result in excessive rates.
Production and General Expenses
NCCI has requested an overall premium level increase of 0.8% for the production and general expenses component of the Revised Rate Filing, of which .7% is allocated to production and 0.1% to general expenses.
The Department disapproved the method by which NCCI calculated these proposed increases for the production and general expense factors--averaging the countrywide expenses over the three most recent years for which fully analyzed data is available: 1997, 1998, and 1999.
Taking into account the experience, background and demeanor of the expert witnesses who testified regarding this issue, the undersigned is unable to say that NCCI's case is more
persuasive. Therefore, NCCI has failed to show, by a preponderance of the evidence, that its requested increase for production and general expenses is justified, and will not result in excessive rates.
Taxes and Assessments
NCCI has requested an overall premium level increase of 0.1% for the taxes and assessments component of the Revised Rate Filing.
The Department does not dispute that this figure reflects an expected increase in the Workers' Compensation Guaranty Association assessment from 1.75% to 2.00% and a reduction in the General Administration assessment from 2.75% to 2.56% and the evidence establishes the validity of these figures.
Therefore, NCCI has shown by a preponderance of the evidence that the 0.1% proposed overall premium level increase allocated to taxes and assessments is reasonable and does not result in a excessive rates.
Profit and Contingencies
NCCI has requested an overall premium level increase of 1.6% for the profit and contingencies component of the Revised Rate Filing. The requested 1.6% overall premium level increase results from the use of a profit factor of negative 3.0% in the Revised Rate Filing. The profit and contingencies
factor underlying the currently approved rates is negative 4.1%, and has been for the past six years.
The resolution of the dispute regarding this component of the Revised Rate Filing centers around one's view of how to best determine the cost of capital, also known as rate of return, for policies to be written during the term of the Revised Rate Filing.
The undersigned has carefully considered the exhibits and testimony reflecting the views of NCCI's experts, Dr. Martin Wolf and Dr. David Appel, and the testimony of the Department's expert, Dr. Richard Cohn, all well-credentialed economists who devote a substantial portion of their practices to the study of cost of capital in the context of workers' compensation rate making.
The arguments in favor of the parties' respective positions are fairly summarized at pages 34-52 of Petitioner's Proposed Recommended Order and at pages 27-55 of the Department's Proposed Recommended Order.
The undersigned is of the view that NCCI has not carried its burden of proof by a preponderance of the evidence to show that its proposed profit factor is reasonable and does not result in excessive rates.
In rejecting the methodology employed by NCCI's experts, the Department has chosen to credit methodology used by
Cohn and recently adopted by insurance regulators in the state of Massachusetts. NCCI has not made a persuasive legal or factual case for its argument that Florida regulators, in so doing, are acting outside their statutory authority.
Policyholder Dividends
One factor in the determination of the profit component, policyholder dividends, requires separate mention.
The Department has historically required NCCI to exclude policyholder dividends from its profit calculation, at least on paper in its annual rate filing. At the final hearing, the Department claimed to not know why NCCI makes such an exclusion, a claim which the undersigned rejects in light of the fact that Florida law specifically provides for the use of policyholder dividends in calculating the profit factor, and doing so would work to NCCI's advantage in terms of justifying this or any other premium level increase sought.
Section 627.072(1)(d), Florida Statutes, provides, in pertinent part:
As to workers' compensation and employer's liability insurance, the following factors shall be used in the determination and fixing of rates:
* * *
(d) Dividends, savings or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers; . . .
The statute is consistent with Actuarial Standard of Practice No. 30, "Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking" ("ASOP 30") which is an authoritative source in the field of actuarial science, and which explicitly includes policyholder dividends as a valid consideration in determining the profit factor.
The Department's contention at the Final Hearing, through its chief actuary, that he still did not understand why NCCI excluded policyholder dividends from its calculation of the profit factor included in the Revised Rate Filing, while disingenuous, does not affect the Findings of Fact as to profit, because NCCI did not prove, by a preponderance of evidence, that NCCI "had adequately reflect[ed] investment income on unearned premium and loss reserves."8 Without such proof by a preponderance of evidence, it is impossible to tell what, if any, impact the Department's requirement that dividends be excluded had on the profit number used in the Revised Rate Filing.
Thus, NCCI has failed to carry its burden to show, by a preponderance of evidence, that its proposed profit factor is reasonable and would not result in excessive rates.
Federal Classifications
NCCI has requested an overall premium level increase of 10% for the federal classifications. Based upon a review of the Order on Rate Filing and the record as a whole, it is apparent that the Department has disapproved the requested overall premium level increase for the federal classifications based upon the same grounds that it disapproved the requested overall premium level increase of 8% for the industrial classifications.
For the reasons set forth above, the evidence establishes that NCCI has failed to prove by a preponderance of the evidence that its proposed components for experience and trend, production and general expenses, and profit and contingencies as set forth in the Revised Rate Filing are actuarially reasonable and would not result in excessive rates for the federal classifications; thus, NCCI has similarly failed to establish by a preponderance of the evidence that its requested overall premium level increase of 10% should be approved. However, NCCI has established by a preponderance of the evidence the validity of its proposed increases in medical benefits and taxes and assessments.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of this proceeding and of
the parties thereto. Sections 120.569 and 120.57, Florida Statutes.
This case is governed by the portion of Florida's Insurance Code, Part I, Chapter 627, Florida Statutes, titled Rates and Rating Organizations and referred to by its short title, the Rating Law. The public policies behind the Rating Law are set forth in pertinent part as follows in Section 627.031, Florida Statutes:
Purposes of this part; interpretation.--
The purposes of this part are:
To promote the public welfare by regulating insurance rates as herein provided to the end that they shall not be excessive, inadequate, or unfairly discriminatory;
To encourage independent action by, and reasonable price competition among, insurers;
To authorize the existence and operation of qualified rating organizations and advisory organizations and to require that specified rating services of such rating organizations be generally available to all authorized insurers; and
To authorize cooperation between insurers in ratemaking and other related matters.
It is the purpose of this part to protect policyholders and the public against the adverse effects of excessive, inadequate, or unfairly discriminatory insurance rates, and to authorize the department to regulate such rates. If at any time the department has reason to believe any such rate is excessive, inadequate, or unfairly discriminatory under the law, it is directed to take the necessary action to cause such rate to comply with the laws of this state.
The Rating Law provides the following guidance regarding factors to be considered by the Department in deciding whether to approve or disapprove a rate filing:
Rate standards.--
The rates for all classes of insurance to which the provisions of this part are applicable shall not be excessive, inadequate, or unfairly discriminatory.
As to all such classes of insurance:
Insurers or rating organizations shall establish and use rates, rating schedules, or rating manuals to allow the insurer a reasonable rate of return on such classes of insurance written in this state. A copy of rates, rating schedules, rating manuals, premium credits or discount schedules, and surcharge schedules, and changes thereto, shall be filed with the department under one of the following procedures:
If the filing is made at least 90 days before the proposed effective date and the filing is not implemented during the department's review of the filing and any proceeding and judicial review, then such filing shall be considered a "file and use" filing. In such case, the department shall finalize its review by issuance of a notice of intent to approve or a notice of intent to disapprove within 90 days after receipt of the filing. The notice of intent to approve and the notice of intent to disapprove constitute agency action for purposes of the Administrative Procedure Act. Requests for supporting information, requests for mathematical or mechanical corrections, or notification to the insurer by the department of its preliminary findings shall not toll the 90-day period during any such proceedings and subsequent judicial review. The rate shall be deemed approved if the department does not issue a notice of intent to approve or a notice of
intent to disapprove within 90 days after receipt of the filing.
If the filing is not made in accordance with the provisions of subparagraph 1., such filing shall be made as soon as practicable, but no later than 30 days after the effective date, and shall be considered a "use and file" filing. An insurer making a "use and file" filing is potentially subject to an order by the department to return to policyholders portions of rates found to be excessive, as provided in paragraph (h).
Upon receiving a rate filing, the department shall review the rate filing to determine if a rate is excessive, inadequate, or unfairly discriminatory. In making that determination, the department shall, in accordance with generally accepted and reasonable actuarial techniques, consider the following factors:
Past and prospective loss experience within and without this state.
Past and prospective expenses.
The degree of competition among insurers for the risk insured.
Investment income reasonably expected by the insurer, consistent with the insurer's investment practices, from investable premiums anticipated in the filing, plus any other expected income from currently invested assets representing the amount expected on unearned premium reserves and loss reserves. The department may promulgate rules utilizing reasonable techniques of actuarial science and economics to specify the manner in which insurers shall calculate investment income attributable to such classes of insurance written in this state and the manner in which such investment income shall be used in the calculation of insurance rates. Such manner shall contemplate allowances for an underwriting profit factor and full consideration of investment income which produce a reasonable rate of return; however, investment income from invested
surplus shall not be considered. The profit and contingency factor as specified in the filing shall be utilized in computing excess profits in conjunction with s. 627.0625.
The reasonableness of the judgment reflected in the filing.
Dividends, savings, or unabsorbed premium deposits allowed or returned to Florida policyholders, members, or subscribers.
The adequacy of loss reserves.
The cost of reinsurance.
Trend factors, including trends in actual losses per insured unit for the insurer making the filing.
Conflagration and catastrophe hazards, if applicable.
A reasonable margin for underwriting profit and contingencies.
The cost of medical services, if applicable.
Other relevant factors which impact upon the frequency or severity of claims or upon expenses.
* * *
After consideration of the rate factors provided in paragraphs (b), (c), and (d), a rate may be found by the department to be excessive, inadequate, or unfairly discriminatory based upon the following standards:
1. Rates shall be deemed excessive if they are likely to produce a profit from Florida business that is unreasonably high in relation to the risk involved in the class of business or if expenses are unreasonably high in relation to services rendered.
* * *
In reviewing a rate filing, the department may require the insurer to provide at the insurer's expense all information necessary to evaluate the
condition of the company and the reasonableness of the filing according to the criteria enumerated in this section.
The department may at any time review a rate, rating schedule, rating manual, or rate change; the pertinent records of the insurer; and market conditions. If the department finds on a preliminary basis that a rate may be excessive, inadequate, or unfairly discriminatory, the department shall initiate proceedings to disapprove the rate and shall so notify the insurer. However, the department may not disapprove as excessive any rate for which it has given final approval or which has been deemed approved for a period of 1 year after the effective date of the filing unless the department finds that a material misrepresentation or material error was made by the insurer or was contained in the filing. Upon being so notified, the insurer or rating organization shall, within 60 days, file with the department all information which, in the belief of the insurer or organization, proves the reasonableness, adequacy, and fairness of the rate or rate change. The department shall issue a notice of intent to approve or a notice of intent to disapprove pursuant to the procedures of paragraph (a) within 90 days after receipt of the insurer's initial response. In such instances and in any administrative proceeding relating to the legality of the rate, the insurer or rating organization shall carry the burden of proof by a preponderance of the evidence to show that the rate is not excessive, inadequate, or unfairly discriminatory. . . .
In the event the department finds that a rate or rate change is excessive, inadequate, or unfairly discriminatory, the department shall issue an order of disapproval specifying that a new rate or rate schedule which responds to the findings of the department be filed by the
insurer. . . .
Section 627.072(1), Florida Statutes, provides additional, and in some cases duplicative, factors to be considered by the Department in workers' compensation insurance rate filings, as set forth below:
As to workers' compensation and employer's liability insurance, the following factors shall be used in the determination and fixing of rates:
The past loss experience and prospective loss experience within and outside this state;
The conflagration and catastrophe hazards;
A reasonable margin for underwriting profit and contingencies;
Dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers;
Investment income on unearned premium reserves and loss reserves;
Past expenses and prospective expenses, both those countrywide and those specifically applicable to this state; and
All other relevant factors, including judgment factors, within and outside this state.
Thus, in exercising its statutory authority to review and approve or disapprove workers' compensation insurance rates, the Department is charged with the duty, in the public interest, to determine whether each of the components included in the rate filing would produce rates that are excessive, inadequate, or unfairly discriminatory. In deciding whether to approve or disapprove a workers' compensation insurance rate filing, Section 627.151, Florida Statutes, mandates that the Department
"shall give consideration only to the applicable standards and factors referred to in ss. 627.062 and 627.072." (Emphasis added.) The Findings of Fact in this Recommended Order demonstrate that the parties adhered to the confines of permissible statutory considerations at all times material to this case.
As noted in the Findings of Fact, there is no contention that NCCI's rate filing, if approved by the Department, would produce rates which are inadequate or unfairly discriminatory. Rather, the case turns on whether NCCI's rate filing would produce excessive rates.
With respect to the technical requirements of a workers' compensation insurance rate filing, Section 627.091(2), Florida Statutes, provides, in pertinent part:
. . . The information furnished in support of a filing may include:
The experience or judgment of the insurer or rating organization making the filing;
Its interpretation of any statistical data it relies upon;
The experience of other insurers or rating organizations; or
Any other factors which the insurer or rating organization deems relevant. . . .
Given the complexity of the regulatory scheme surrounding the ratemaking process, there are surprisingly few cases which discuss the standards applicable to the review of property and casualty insurance rate filings. See generally
State Farm Mutual Automobile Ins. Co. v. Williams, 192 So. 2d
312 (Fla. 1966); Nationwide Mutual Ins. Co. v. Williams, 188 So. 2d 368 (Fla. 1st DCA 1966); Mutual Ins. Rating Bureau v. Williams, 189 So. 2d 389 (Fla. 1st DCA 1966); Liberty Mutual v. Larson, 169 So. 2d 866 (Fla. 1st DCA 1964).
Although these decisions are not squarely on point and are over 35 years old, they provide sufficient guidance for the case at hand.
In Mutual Ins. Rating Bureau v. Williams, 189 So. 2d
389 (Fla. 1st DCA 1966), an insurer appealed from an order disapproving an automobile insurance rate filing. The court held that the state insurance commissioner lacked authority to change by way of increase or decrease any of the requested rates. Instead, the commissioner was limited to approving or disapproving the rate filing, and stating the reasons for disapproval.
In State Farm Mutual Automobile Ins. Co. v. Williams,
192 So. 2d 312 (Fla. 1st DCA 1966), an insurer appealed the denial of rate filing for an increase in automobile insurance coverage premiums. The court held that the insurance commissioner was justified in rejecting a rate filing which would, if approved, have doubled the insurer's profit margin over the prior filing. More broadly, the case holds that the insurer is required to prove by a preponderance of the evidence
that each item of its filing would produce rates which were not excessive, inadequate, nor unfairly discriminatory.
In Nationwide Mutual Ins. Co. v. Williams, 188 So. 2d
368 (Fla. 1st DCA 1966), an insurer appealed from an order denying a requested increase in automobile insurance rates. Once again, the court held that the insurer failed to prove by a preponderance of the evidence that each item of its filing would not produce rates which were excessive, inadequate, or unfairly discriminatory. Specifically, the court found that the insurer failed to support the increase it sought in particular territories, but rather assigned arbitrary increases to the state as a whole based upon past experience. The court noted that the insurance commissioner had limited authority and must approve or disapprove what the insurer elects to submit. Further, the court held that authorization to request additional information from the insurer regarding the filing does not include the authority to utilize the commissioner's independent judgment to modify the insurer's request.
Based upon the foregoing cases and the relevant provisions of the Rating Law, the undersigned rejects NCCI's assertion that the Department bound to accept the actuarial judgments of NCCI's employees with respect to any and all components of the Revised Rate Filing.
Under NCCI's approach to the statute, if reasonable actuaries disagree regarding the appropriateness of the rate indication contained in the Revised Rate Filing, then NCCI's rate indication should be approved as filed. If this were so, the Department's statutory authority to reject a rate filing would be meaningless.
Rather, when the Department challenges one or more components of the filing which, individually or taken together, render a proposed premium increase unjustified, in the Department's view, it is up to NCCI to prove the reasonableness of its components.
As set forth in the Findings of Fact section of this Recommended Order, NCCI has failed to establish by a preponderance of the evidence that three of the four broad component categories contained in the Revised Rate Filing are reasonable and would not result in rates that are excessive. It follows that the Department was acting within its authority in disapproving the Revised Rate Filing.
NCCI argues that the Order on Rate Filing constitutes a departure from the essential requirements of law and an abuse of discretion by the Department to the extent that it fails to grant unqualified approval to those portions of the Revised Rate Filing with which the Department agrees. In support of this argument NCCI erroneously relies upon Section 627.101(1),
Florida Statutes, which states, in pertinent part: ”. . . If the department determines that part of a rate filing does not meet the applicable requirements of this part, it may reject so much of the filing as does not meet these requirements, and approve the remainder of the filing."
The statute uses the permissive word "may” and thus does authorize the Department to do as NCCI suggests---approve a rate increase supported by the components about which the parties do not disagree, but there is no authority for the proposition that the Department is required to reach that result.
NCCI argues that the Department further violated Section 627.101(1), Florida Statutes, by requiring NCCI to take additional steps to obtain a rate increase which would have, at least at the time of the Order on Rate Filing, met with the Department’s approval, i.e. a 1.9% overall premium level increase for the experience component, a 0.7% overall premium level increase for the benefits component, and a 0.1% overall premium level increase for the taxes and assessments component of the Revised Rate Filing. This argument is also unsupported by the statute relied upon. The statute does not mandate that the Department accept portions of a filing with which it agrees, nor does it preclude the Department from making a counteroffer
set to expire in a very short period of time, as the Department did in the Order on Rate Filing.
Finally, the Revised Rate Filing seeks a rate increase to be effective as of January 1, 2002. In its Petition, NCCI requests that the rate increase ultimately permitted by the Department, if any, be made retroactive to January 1, 2002.
In support of its position, NCCI relies upon Section 627.111(2), Florida Statutes, which states:
If the order of the department disapproves the filing, the filing shall not become effective during the effectiveness of such order. If the order of the department approves the filing, the filing shall become effective upon the date of the order or upon such subsequent date as may be satisfactory to the insurer or rating organization that made the filing.
NCCI concedes that a rate filing may only go into effect upon obtaining an order from the Department which approves the rate filing pursuant to Section 627.111, Florida Statutes, which does not address retroactivity at all. NCCI cites no authority for the proposition that under these circumstances, the legislature’s silence operates to authorize or require the Department to consent to implementing a rate increase retroactively, in the event that a rate increase emerges from this process.
