STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CRITERION INSURANCE COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 83-832

)

DEPARTMENT OF INSURANCE, )

STATE OF FLORIDA, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, William E. Williams, held a formal hearing in this cause on June 20, 1993, at Tallahassee, Florida.

APPEARANCES

For Petitioner: August P. Alegi, Esquire

Criterion Insurance Company 5260 Western Avenue

Washington, D.C. 20047

For Respondent: Daniel Y. Sumner, Esquire

Edwin R. Hudson, Esquire Department of Insurance 413-B Larson Building Tallahassee, Florida 32301

At issue in this proceeding is an October 13, 1982, rate filing submitted by Criterion Insurance Company ("Petitioner") to the State of Florida, Department of Insurance ("Department") pursuant to Section 627.0651, Florida Statutes. On February 22, 1983, the Department issued its Notice of Intent to Issue Final Order ("the notice") determining, on a preliminary basis, that Petitioner's rate filing contained rates or rate changes which appeared to be excessive or unduly discriminatory.

Final hearing in this cause was held on June 28, 1983, pursuant to Amended Notice of Hearing dated June 13, 1983. At the final hearing, Petitioner called Charles T. Connolly, R. Stephen Pulis, and Patrick J. Grannan as its witnesses. Petitioner offered Petitioner's Exhibits A through S, which were received into evidence. The Department called Kenneth Ritzenthaler and Jerome F. Vogel as its witnesses. The Department offered Respondent's Exhibits 1 through 3, which were received into evidence.

Both counsel for Petitioner and the Department have submitted proposed findings of fact for consideration by the Hearing Officer. To the extent that those proposed findings of fact are not contained in this order, they have been

specifically rejected as being either irrelevant to the issues involved in this cause, or as not having been supported by the evidence.

FINDINGS OF FACT

1. Petitioner is an insurance carrier organized and existing under the laws of the District of Columbia, and authorized by the Department to conduct business in the State of Florida. On October 13, 1982, Petitioner submitted a private passenger motor vehicle insurance rate filing to the Department. That rate filing disclosed the following effect of the requested rate revisions:

   
   

   Bodily Injury No Change

   Property Damage No Change

   Personal Injury 35.1 percent

   Medical Payments No Change

   Uninsured Motorist 6.2 percent Additional Personal

   Injury 35.1 percent

   Liability 9.0 percent

   Comprehensive No Change

   Collision No Change

   Physical Damage No Change

   TOTAL AUTO 5.5 PERCENT

   
   

2. The Department conducted an initial review of petitioner's rate filing consisting of a review of premiums and prior rate history of he company, losses, expense components, and underwriting profit and investment income. The Department reviewed the rate level for all coverages included in Petitioner's rate filing, which is customary agency policy when a rate filing is made. The record in this cause establishes that even when an insurer indicates a zero percent change in coverage rate, that rate selection must he justified, in that there are instances when a rate decrease might be indicated by actuarial data.

   
   

3. Petitioner's October 13, 1982, rate filing employs a 22.8 percent annual trend factor for Personal Injury Protection ("PIP") coverage. A trend factor is a measure, based upon past experience, which indicates the average change in the cost of claims projected one year into the future. It is, in essence, primarily a measure of the effect of inflation on average claim costs, which are influenced by such factors as wage and medical costs. Petitioner calculated its annual PIP trend factor by assigning a 42 percent credibility weight to Petitioner's countrywide data, and a 58 percent credibility weight to the National Association of Independent Insurers "Fast Track" Florida data. Although the data utilized by Petitioner is actuarially acceptable, Petitioner's methodology failed to include other accepted sources of data which greatly affect the accuracy of Petitioner's selection of a 22.8 percent annual trend factor. The record in this cause establishes that a more accurate prediction can be made utilizing additional data such as "Fast Track" trend data for both Florida and the United States; Insurance Services Office trend data; And medical and wage consumer price indexes. When data from each of these sources were collected and exponential curves and straight lines of best fit were calculated to plot a series of data points to extrapolate an annual trend range, a reasonable range for PIP trend factors was established of from between 9 to 13 percent.

   
   

4. Although the Department objects to Petitioner's utilizing only six data points to establish its trend factor, the record in this cause establishes that a range of 6 to 12 data points is actuarially acceptable. However, based upon

   the information considered by Petitioner in its rate filing, and the record in this cause, it appears that a 22.8 percent trend factor is excessive.

   
   

5. In its October 13, 1982, rate filing Petitioner selected an unallocated loss adjustment expense factor of 1.152. An unallocated loss adjustment expense factor is developed to determine a proportionate amount by which loss expenses and allocated loss expenses should be increased to reflect overhead. The unallocated loss adjustment factor is an expense item representing the cost of adjusting claims which cannot be attributed to any particular claim. Petitioner calculated its unallocated loss adjustment expense factor for its rate filing by taking the arithmetic average of the unallocated loss adjustment expense factors experienced in the years 1979, 1980, and 1981, which were, respectively, 1.205, 1.151, and 1.100. As indicated above, the average of these three years proved to be 1.152. It is undisputed that averaging the three most recent calendar years of a carrier's experience is an accepted actuarial technique. The Department objects to this approach primarily because of its contention that the

   1.205 factor for 1979 is an "aberration," and that Petitioner's experience or 1979, 1980, and 1981 demonstrates a downward trend. However, the record in this cause establishes that Petitioner's actual unallocated loss adjustment expense results for 1982 produce a factor of 1.134, which result was unknown to Petitioner at the time of the filing here in question. There is no evidence of record to establish that the 1.205 unallocated loss adjustment expense factor for 1979 is other than an accurate reflection of Petitioner's experience, or that that situation might not occur again. Further, Petitioner's actual unallocated loss adjustment expense factor for 1982 of 1.134 establishes that the 1979, 1980, and 1981 unallocated loss adjustment expense factors did not establish a true downward trend. Accordingly, the record in this cause establishes that Petitioner's unallocated loss adjustment factor of 1.152 in this rate filing is reasonable.

   
   

6. Rule 4-43.02, Florida Administrative Code, prohibits allocating an insurer's administrative expenses as a percentage of premium, rather requiring that such expenses be "flattened." In the rate filing here in question, Petitioner did not "flatten" its administrative expenses. Further, petitioner contends that, in the context of this proceeding, the "flattening" of expenses applies only to PIP and uninsured motorist coverage since other coverages do not involve a change in rates. However, as indicated above, the Department's policy is to review rates for all coverages in a rate filing so that the issue of "flattening" applies to all such coverages, regardless of the amount of change. In Petitioner's filing, taxes, licenses and fees are not listed as a fixed expense, but are included as a variable expense. As a variable expense, these fees will be charged as a percentage of premium for all coverages, a procedure specifically prohibited by Rule 4-43.02. The record in this cause clearly establishes that there are different base premium rates charged to policyholders by class and territory. Accordingly, when all of petitioner's coverages are considered, the "flattening" of miscellaneous licenses and fees could result in cost savings to high premium policyholders. As a result, the record in this cause establishes that failure to "flatten" all administrative expenses for all coverages could result in unfairly discriminatory rates.

   
   

7. By virtue of legislation which became effective October 1, 1982, insurers are required to make available excess underinsured motorist coverage. See, Section 537.727(2)(b), Florida Statutes. Since this legislation created a new type of coverage, standard rate-making procedures do not apply. However, as a result of a study conducted by the Department, the Florida Legislature, and State Farm Insurance Company, relationships were determined between the rate for a given limit of uninsured motorist coverage and the rate for the same limit of

   excess underinsured motorist coverage. The relationships established by this study, which have been adopted as the policy of the Department are:

   
   

   10/20 excess underinsured=1.20 x 10/20 uninsured motorist rate 15/30 excess underinsured=1.25 x 15/30 uninsured motorist rate 25/50 excess underinsured=1.10 x 25/50 uninsured motorist rate 50/100 excess underinsured=1.10 x 50/100 uninsured motor. rate

   
   

8. It is important that a reasonable rate for excess underinsured motorist coverage be established to discourage insurers from pricing the coverage out of line with the same limit of uninsured motorist coverage, thereby discouraging purchase of that coverage.

   
   

9. The excess underinsured motorist rates for 10/20 limits contained in Petitioner's rate filing are approximately 65 percent higher than the uninsured motorist coverage for the same limits. There is no competent actuarial data of record to justify a finding of any risk differential between excess underinsured motorist coverage and uninsured motorist coverage to explain the differential between Petitioner's proposed rate and the rate indicated by the above-mentioned study. This becomes particularly noteworthy when it is considered that other companies previously filing rates for excess underinsured motorist coverage with the Department have been substantially in agreement with, or lower than, rates reflected in that study. As previously indicated, the record in this cause contains no credible evidence to support petitioner's rate proposal for excess underinsured motorist coverage for limits less than 50/100.

   
   

10. Effective October 1, 1982, insurers were required to file separate profit and contingency factors as a result of amendments to Sections 627.0651(3)(d), Florida Statutes, and the promulgation of Rule 4-57.01, Florida Administrative Code. Prior to that time, profit and contingency factors had been considered as one factor for rate-making purposes. The purpose of the amendments to the statute and the rule were to require insurers to reflect investment income in their motor vehicle insurance rates.

    
    

11. In the October 13, 1982, rate filing as initially filed, petitioner showed a combined profit and contingency factor of 5 percent, and reduced rate level indications to reflect investment income. This was consistent with Petitioner's pattern of having utilized, in all recent prior rate findings, a combined profit and contingency factor of less than 5 percent after investment income. When advised by the Department of the necessity to reflect profit and contingency factors separately, Petitioner amended its application to show a zero percent profit factor and a 5 percent contingency factor. With regard to the 5 percent contingency factor, there is no evidence of record to demonstrate that Petitioner adjusted expected losses for the difference between prior rate level indications and actual selected rate changes. Further, with respect to the profit factor, the record in this cause clearly reflects that Petitioner expects to realize an underwriting profit from its contingency provision, indicating that some underwriting profit is embedded in Petitioner's contingency factor, thereby eliminating the effect of investment income on rates. Inasmuch as the profit and contingency factors in Petitioner's filing apply to all coverages, and are incorrectly filed, the rate level indications based upon these profit and contingency factors for all coverages are likewise incorrect to the extent affected by profit and contingencies. In sum, Petitioner has failed to establish the validity of its choice of a zero percent profit factor and a 5 percent contingency factor in its rate filing.

    CONCLUSIONS OF LAW

    
    

12. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, this proceeding. Section 120.57(1), Florida Statutes.

    
    

13. Section 627.0651(10), Florida Statutes, provides, in part, as follows:

    
    

    . . . [I]n any administrative proceeding relating to the legality of [a] rate, the insurer or rating organization shall carry the burden of proof by a preponderance of of the evidence to show that the rate is not excessive, inadequate, or unfairly discriminatory . . .

    
    

14. Section 627.0651.(3), Florida Statutes, provides that:

    
    

    Rates shall be deemed excessive if they are likely to produce a profit from Florida business that is unreasonably high in rela- tion to the risk involved in the class of business or if expenses are unreasonably high in relation to services rendered.

15. Section 627.0651(6), Florida Statutes, provides that: One rate shall be deemed unfairly dis-

    criminatory in relation to another in the

    same class if it clearly fails to reflect equitably the difference in expected losses and expenses.

    
    

16. It is specifically concluded, as a matter of law, that in light of Petitioner's having selected an annual trend factor for PIP coverage that is excessive; having failed to "flatten" miscellaneous licenses and fees as required by Rule 4-43.02, Florida Administrative Code having proposed an excessive rate for excess underinsured motorist coverage for limits of less than 50/100; and having failed to justify its choice of a zero percent profit factor and 5 percent contingency factor, Petitioner has failed to establish by a preponderance of the evidence that its proposed rates are not excessive or unfairly discriminatory.

Accordingly, based upon the foregoing findings of fact and conclusions of law, it is

RECOMMENDED that a Final Order be entered by the State of Florida, Department of Insurance, disapproving Petitioner's private passenger automobile rates as proposed in its October 13, 1982, filing.

DONE AND ENTERED this 3rd day of August, 1984, at Tallahassee, Florida.

WILLIAM E. WILLIAMS

Hearing Officer

Division of Administrative Hearings Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301 904/488-9675

FILED with the Clerk of the Division of Administrative Hearings this 3rd day of August, 1984.

COPIES FURNISHED:

August P. Alegi, Esquire Criterion Insurance Company 5260 Western Avenue

Washington, D.C. 20047

Daniel Y. Sumner, Esquire Edwin R. Hudson, Esquire Department of Insurance 413-B Larson Building Tallahassee, Florida

Honorable Bill Gunter Insurance Commissioner and

Treasurer The Capitol

Tallahassee, Florida 32301

Ronald Harrop, Esquire Gurney and Handley, P.A. Post Office Box 1273 Orlando, Florida 32802

Docket for Case No: 83-000832

Orders for Case No: 83-000832