STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PROTECTIVE LIFE INSURANCE COMPANY, )

)

Petitioner, )

)

vs. ) Case No. 98-2132

)

DEPARTMENT OF INSURANCE )

AND TREASURER, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a hearing was held by Stephen F. Dean, assigned Administrative Law Judge of the Division of Administrative Hearings, on August 21, 1998, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Frank J. Santry, Esquire

Granger, Santry, Mitchell & Heath, P.A. 2833 Remington Green Circle Tallahassee, Florida 32308

For Respondent: S. Marc Herskovitz, Esquire

Jeffrey W. Joseph, Esquire Department of Insurance

and Treasurer

612 Larson Building

Tallahassee, Florida 32399-0333 STATEMENT OF THE ISSUE

Whether Petitioner should be granted a forty percent rate increase on specific cancer insurance policies.

PRELIMINARY STATEMENT

On February 27, 1998, Petitioner filed for a forty percent

increase with the Department of Insurance (Department), for the

following insurance policy and writer forms: CA-03-FL, CA-04-FL, CA-05-FL, CA-07-FL, CA-08-FL, IC-02-FL, DD-01-FL, and FO-0101,

hereafter subject forms. Each of the foregoing policies provide benefits only in the event an insured contracts cancer. On

March 6, 1998, the Department requested additional information to which the Petitioner responded on March 18, 1998. Petitioner also supplied the Department with additional materials on

March 23, 1998, in response to a telephonic request from the Department. On April 1, 1998, the Department denied the Petitioner's request for a rate increase citing five grounds. On April 15, 1998, the Petitioner supplied to the Department additional materials supporting its rate increase. On April 22, 1998, the Petitioner filed a petition requesting formal hearing. The Department forwarded the request to the Division of Administrative Hearings, and on May 28, 1998, the case was noticed for a final hearing on August 21, 1998.

The case was heard on August 21, 1998, in Tallahassee, Florida. Petitioner presented the testimony of Robert DeGeeter, the deposition testimony of Frank Dino, and introduced 11 exhibits which were received into the record. The Petitioner sought to introduce the deposition testimony of James Bracher, and the parties were permitted to brief the matter. Having considered the briefs of the parties and being advised in the

premises, the deposition of James Bracher is determined to be admissible.

The Department presented the live testimony of Frank Dino, and the deposition testimony of an adverse witness, Russell Bailey. The Department introduced two exhibits which were received into evidence.

The letter denying the rate increase, Petitioner's Exhibit 6, set out five grounds for denying the increase, as follows:

1. The filing contains two independent submissions for the pre- and post-

   June 01, 1994. Although not material to this filing s. 627.410(6)(e), Florida Statutes, requires that all forms with similar benefits must be pooled indifferent of the date of sale.

   
   

2. The filing did not adequately justify the assumed medical trend of 35% used to justify the filed rate increase as required by rule

   4-149.006(1).

   
   

3. The filing has not justified the lapse assumption used as required by rule 4-149.006 (1).

   
   

4. The filing appears to contain incorrect expected claims. The pattern of expected claims is inconsistent and the lifetime loss ratio developed by such claims pattern is less than the minimum loss ratio required by rule 4-149.005.

   
   

5. The company has been unable to provide the original durational loss ratio table used to demonstrate that the expected claims pattern is in compliance with the 65% loss

ratio standard required by rule 4-149.005.

At the commencement of the hearing, the Department indicated that the reasons cited in paragraph 1 were not a basis for denying the rate increase. During the hearing, the Department's expert, who had recommended the increase be denied, testified

that the grounds stated in paragraph 4 of the letter would not be a basis for denial. See transcript page 185, lines 16 through 21.

Therefore, only the grounds for denial stated in paragraphs 2, 4, and 5 of the Department's letter will be addressed in detail in these findings.

The Department argued in its post-hearing brief that the evidence presented by the Petitioner at hearing was incapable of being considered by the undersigned because the determination required special expertise. While special expertise may be helpful in assessing the evidence presented by the parties, the opinion evidence of experts was offered by both sides which may be considered. The evidence presented by the parties, including the opinion of the experts, forms the basis for the findings and conclusions which follow. This is a de novo proceeding. There is no basis for the exclusion of any of the evidence on the grounds that it was not presented until hearing, particular in light of the pre-hearing discovery conducted by both sides which included the taking of the depositions of the experts of both

parties.

Subsequent to the hearing, a transcripts was ordered and both sides prepared proposed findings which were read and considered.

FINDINGS OF FACT

1. The subject cancer policies were first offered for sale after being approved by the Department in late 1989 or early 1990. These policies provide various medical benefits. The policies generally limit medical-surgical benefits; however, the policies provide no limits on radiation, chemotherapy, and related blood transfusions. The Petitioner no longer sells these policies.

2. On or about November 5, 1997, Petitioner filed for a rate increase of 50 percent. After consideration of the Petitioner's request, the Department approved an increase of 15 percent on December 24, 1997.

3. The 15 percent rate increase was accepted by the Petitioner. It was the third rate increase granted to the Petitioner by the Department since January 1, 1996. The previous two rate increases were for 20 percent and 11 percent respectively.

4. Within two months of granting the 15 percent rate increase, Petitioner requested the 40 percent rate increase which is at issue in these proceedings. The Petitioner's rate increase was accompanied by two actuarial memoranda submitted by Lewis &

   Ellis, Inc. The first memorandum was for policies issued prior to June 1, 1994, and the second memorandum was for policies issued after that date.

5. By letter dated March 6, 1998, Frank Dino, Chief Actuary, Bureau of Life and Health Forms and Rates, requested additional information from the Petitioner regarding justification for the proposed rate increase. Mr. Dino's letter mentioned 13 items. See Petitioner's Exhibit 3.

6. By letter date March 18, 1998, Robert E. DeGeeter, Consulting Actuary of Lewis & Ellis, Inc., responded to Mr. Dino's aforementioned letter.

7. Mr. DeGeeter stated that the reason for the proposed rate increase was: "The need for the rate increases on the Cancer policies has arisen solely from the continuing large increase in claim costs under the unlimited RC (Radiation and Chemotherapy) benefits of the impacted policies."

   See Petitioner's Exhibit 4.

   
   

8. On March 23, 1998, Mr. Dino and Mr. DeGeeter spoke by phone concerning the information provided by Mr. DeGeeter in his letter of March 18, 1998. In response to this telephone call, Mr. DeGeeter wrote Mr. Dino on that date regarding the medical trend. Without further explanation, Mr. DeGeeter stated the medical trend as a percentage.

9. The medical trend is the claim payment difference attributable to the combined effects of medical provider price

   increases, utilization changes, medical cost shifting, and new medical procedures and technology from one year to the next. See Section 4-149.006(3)(b)18, Florida Administrative Code. The medical trend factor is a future projection from the end of the insurance company's actual historical experience until one year after a rate increase is implemented. The medical trend factor is used to determine whether the anticipated lifetime loss ratio meets the minimum loss ratio standard which is 56.51 percent for the subject forms.

10. Robert DeGeeter, who was qualified as a actuarial expert, testified regarding his submissions in support of the rate increase. Mr. DeGeeter reiterated that the subject policies did not provide caps on chemotherapy and radiation therapy (C&R), but did have caps on other medical benefits. Based upon the company's records of claims payments by type, the claims for C&R constituted 71 percent of the total payout. Similarly, the Petitioner's records indicated a 35 percent increase in the payouts for C&R therapy. The product of 35 percent and 71 percent resulted in a weighted average of 24.85 percent for C&R therapy for the 12 month period. See transcript page 50.

11. The 35 percent increase in payouts in C&R benefits was based upon the information contained in the last column of Petitioner's Exhibit 8. The information provided on Petitioner's Exhibit 8 was taken from the company's accounting records.

12. Mr. DeGeeter stated that he used national data for the purposes of making his analysis; however, the company had extracted the Florida experience as a subset of the national data with which the Florida data was consistent. No evidence was presented that the national data impaired the accuracy of the actuarial analysis.

    EXPECTED CLAIMS

    
    

13. The expected claims data originally submitted by Petitioner reflected the historical claims experience of Petitioner contrasted with the claims it projected to incur when the policies were first developed and marketed in the late 1980s and early 1990s. The company's presentations projected the claims it expected to receive in the future based upon current updated information. This methodology was utilized in the Petitioner's request for rate increase submitted on November 5, 1997, and was accepted by the Department's actuaries when they approved that rate increase.

14. In this instance, the Department raised questions about the expected claims figures in the subject rate increase. It was only after the deposition of the Department's actuary had been taken that the Petitioner became aware of the Department's changed view of how to analyze future expected claims. See transcript pages 82-85.

15. According to the Department's current interpretation, expected future claims are to be compared to those the company

    expected when it originally priced the insurance product, not historical data. The Department compares the future claims projections in the rate increase filing against the company's original expectations as to claims to determine whether it meets the Actual to Expected Claims Ratios Tests set forth in Section 4-149.005(2)(b)(3), Florida Administrative Code.

16. At hearing, the Petitioner submitted schedules and testimony of its actuary in accord with the Department's current position regarding expected claims. See Petitioner's Exhibit 10.

17. Petitioner's projected claims are not less than 85 percent of its expected claims using the Department's definition of expected claims. See transcript page 85, 207, and Petitioner's Exhibits 4 and 10.

18. Further, the pattern of projected loss ratios is consistent, and the anticipated life-time loss ratios are greater than or equal to those required by the rules. See Rule 4-149.005 and Petitioner's Exhibit 7.

19. In addition the so called "*N test" is also met. Contrasting the durational loss ratios based on the pricing at the inception of the policy with the anticipated loss ratios assuming the rate request was implemented, the resulting current Anticipated Loss Ratio is not less than the greater of the initially filed loss ratio and the weighted average of the Anticipated Loss Ratios *N, as defined in Section 4.149.006(4)(b), Florida Administrative Code, where the weights

    are the present value of the premiums over the entire future lifetime of the policy year or issue year. See transcript pages 191-193 and 207; and Petitioner's Exhibit 10.

    DURATIONAL LOSS RATIO TABLE

    
    

20. Regarding lifetime loss ratios, the rule requires that the actual loss cannot be less than 85 percent of the projected loss. This prevents overstating expected losses and then pocketing the difference as a windfall profit. See transcript pages 82-85. The last three pages of Petitioner's Exhibit 7 states the original durational loss data provided to the Department.

21. Durational loss ratios are related to the comparisons discussed above. Further, durational loss ratios apply only to a small portion of the filing involving policies sold after June 1, 1994. The Respondent claims that the Petitioner did not provide with its rate increase filing the durational loss ratios which the company expected from the subject policies when they were originally filed in the late 1980s and 1990s. While the Petitioner did not provide this information with the current rate increase filing, the information was part of the original filing submitted by the company. The original pricing memoranda are contained within the Department's records. Further, the Petitioner resubmitted the requested information at hearing. See Petitioner's Exhibit 11.

22. The durational loss information provided reflects that the tests set forth in Section 4-149.05(2)(b)1, are met. See transcript pages 87, 93, and Petitioner's Exhibits 7 and 10.

23. The fact that material was prepared for presentation at hearing was not shown to impair its accuracy.

    CONCLUSIONS OF LAW

    
    

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

25. The burden of proof is upon the Petitioner. Section 627.410(6)(a), Florida Statutes, prohibits an insurer from delivering a health care insurance policy in Florida unless the premium rates charged for that policy and any changes in those rates have been filed with the Department.

26. Section 627.411(1)(e), Florida Statutes, provides:

    
    

    1. The Department shall disapprove any form filed under section 627.410, or withdraw any previous approval thereof, only if the form:

       
       

       * * *

       
       

       (e) Is for health insurance, and provides benefits which are unreasonable in relation to the premium charged, contains provisions which are unfair or inequitable or contrary to the public policy of this state or which encourage misrepresentation, or which apply rating practices which result in premium escalations that are not viable for the policy holder market or result in unfair discrimination in sales practices. (emphasis supplied).

27. The Department's letter denying the rate increase dated

    April 1, 1998, sets forth specific grounds for disapproval pursuant to Rule 4-149, Florida Administrative Code.

    1. The filing contains two independent submissions for the pre- and post-

       June 01, 94. Although not material to this filing s. 627.410(6)(e), Florida Statutes, requires that all forms with similar benefits must be pooled indifferent of the date of sale.

       
       

    2. The filing did not adequately justify the assumed medical trend of 35% used to justify the filed rate increase as required by rule

       4-149.006(1).

       
       

    3. The filing has not justified the lapse assumption used as required by rule 4-149.006 (1).

       
       

    4. The filing appears to contain incorrect expected claims. The pattern of expected claims is inconsistent and the lifetime loss ratio developed by such claims pattern is less than the minimum loss ratio required by rule 4-149.005.

       
       

    5. The company has been unable to provide the original durational loss ratio table used to demonstrate that the expected claims pattern is in compliance with the 65% loss ratio standard required by rule 4-149.005.

    
    

28. The first ground stated above was conceded to be immaterial to the disapproval. At the hearing, the Department's expert, Mr. Dino, stated that the grounds contained in paragraph

    3 above would not be a basis for denial. See transcript page 185.

29. Section 627.410(6)(b), Florida Statutes, provides that the Department may establish by rule procedures to be used in ascertaining the reasonableness of benefits and relationship to

    premium rates.

    
    

30. Section 4-149.006(1), Florida Administrative Code, provides:

    In order for a rate filing to be reviewed properly by the Department, the actuarial memorandum required by Rule 4-1149.003 (2) (b)4., shall contain the items listed in subsection (2), below, for a new product filing, a rate revision or justification of existing rates. Pricing assumptions shall reflect insurer experience to the degree credible, an industry experience where experience is not credible, available, or appropriate. Assumptions shall reflect what the insurer fully expects to occur, rather than assumptions developed primarily for rate filing purposes based on sound actuarial principles. All such items shall be adequately justified by supporting data.

    
    

    In reviewing these assumptions, the Department will use, as an initial point of reference, comparisons of the assumptions with those from similar products of the same insurer, similar products of other insurers and independent studies. If an insurer provides projections that differ from those historically experienced for similar coverage, it shall provide supporting data to justify how and why the projections will differ from the actual historical experience. Additional information will be required, if, given the particular facts and circumstances of the filing, the Department determines that additional information is necessary to properly complete its review of the filing to determine if the benefits are reasonable in relation to the premiums charged. All filings reviewed under Rules 4-149.001 through 4-149.006 shall be reviewed in accordance with sound actuarial principles and, except where the context plainly does not involve an actuarial determination, all adverbs in these rules such as "properly" and "appropriately" shall be construed in light of those principles.

31. Section 4-149.002(5)(a), Florida Administrative Code, applies to the majority of the forms included in the rate increase. All the policies in this rate filing were approved before February 1, 1994. The Petitioner issued very few policies on these forms after June 1, 1994. A copy of the October 1, 1993, rules, which apply to the majority of these forms, was introduced as Petitioner's exhibit 13.

32. Regarding the forms subject to the 1993 rules,

    
    

    Rule 4-149.004(1), Florida Administrative Code, specifically provides that national records of premiums and benefits will be maintained, as well as Florida information. Further, forms for similar risk classes issued under similar underwriting standards may be combined for evaluating data particularly where statistical credibility would be materially improved. There was no problem with Petitioner using national data in support of its Petition.

33. Regarding the forms subject to the 1993 rules, Rule 4- 149.006(5), Florida Administrative Code, provides:

    The insurer shall file notice of any changes in the methods of expected loss ratios shown in Rule 4-149.003(2).

    
    

34. Rule 4-149.006(5), Florida Administrative Code, concerning rating revisions provides:

    For Group Policies, pursuant to the provisions of Section 627.410(6)(b), Florida Statutes, relating to exemptions, the filing requirements shall be in accordance with subsections (5) and (6), below, and are otherwise limited to the following, unless an

    Actuarial Memorandum (see Rule 4-149.006) is otherwise requested by the Department.

    
    

    1. File the "anticipated" loss ratio for each Group Rating Class. The anticipated loss ratio shall be the expected ratio of claims to premiums over the entire future period for which rates are computed to provide coverage. . . [.]

       
       

    2. Maintain on file with the Department all current rate manuals and a general description of the procedures on methods for setting the initial and renewal rates, including a description of each Group Rating Class to which the manuals, procedures or methods apply.

    
    

35. Discussing (b), above, first, the record reveals Petitioner filed this information with its original filing, "maintain(ing) on file with the Department all current rate manuals, etc." The Petitioner is responsible for updating these materials; however, it cannot be responsible technically for "maintaining" that which is in possession of the Department. In this case, the evidence shows Petitioner filed this information originally, has updated the Department in the course of filing its previous rate revisions, and re-filed its original data for the Department's convenience at hearing.

36. Regarding the reasonableness of the increase of those forms governed by the 1993 rules, Rule 4-149.005(2), Florida Administrative Code (1993) provides the formulas for assessing Minimum Loss Ratio. The rule provides that the resulting ratio will not be greater than 80%.

37. Rule 1-149.005(2)(d)1, provides that the average annual

    premium for a group policy shall be estimated based on an anticipated distribution of business considering all significant criteria having a rate difference and assuming an annual mode for all certificates. This was done.

38. Regarding those policies sold after February 1, 1994, Section 4-149.005(1), of the current Florida Administrative Code, provides that benefits will be determined to be reasonable in relationship to the premium rates charged if the premium schedule is not excessive, not inadequate, and not unfairly discriminatory.

39. Section 4-149.005(2), Florida Administrative Code, regarding post February 1994 policies provides as follows:

    1. A premium schedule is not excessive if the following are true:

       
       

       1. For a new Policy Form, Group or Individual, the Anticipated Loss Ratio, as defined in Rule 4-149.006(3)(b)20., is not less than the appropriate adjusted entry in the loss ratio tables, in subsection (4), below.

          
          

       2. For an Individual Policy Form approved on or after 2/1/94 or issued on or after 6/1/94, the Premium Schedule satisfies 1. Through 3., below:

    
    

    1. The current Anticipated Loss Ratio is not less than the greater of the initial filed loss ratio and the weighted average of the Anticipated Loss Ratios *N, as defined in Rule 4-149.006(4)(b), where the weights are the present value of premiums over the entire future lifetime by policy year or issue year;

       
       

    2. The current Lifetime Loss Ratio, as defined in Rule 4-149.006(3)(b)24., is not less than the initial filed loss ratio; and

    3. The Actual-to-Expected Claims Ratios, as defined in Rule 4-149.006(4)(a), for the Policy Form are, both in pattern and aggregate value, consistently at or in excess of .85.

    
    

40. Rule 4-149.005(4) sets forth "loss ratios for individual and group policies approved on or after February 1, 1994, or issued on or after June 1, 1994." Subsection (c) applies to the subject forms, which are individual medical expense policies that are guaranteed renewable. Therefore, the applicable loss ratio is 65 percent, which should be adjusted to the size of the premium according to the formula in subsection (a).

41. The Petitioner's expert who had made the calculations testified. The procedures outlined above were followed and the minimums established in the rules were met for both the pre and post 1994 forms. Rule 1-149.005(1)(a), Florida Administrative Code (1993) provides a 55 percent minimum loss ratio for the subject forms, adjusted in a manner that is similar to the current regulations. Florida Administrative Code Rule

    4-149.005(1)(a),(c) and (d) (in effect on 10/1/93).

    
    

42. After adjustments, the minimum loss ratio for the subject forms issued before June 1, 1994, is 55 percent and it is

    59.93 percent for forms issued after June 1, 1994. The weighted average minimum loss ratio for the combined policies is 56.51 percent.

43. Rule 4-149.006(2)(r), Florida Administrative Code,

    requires the inclusion of the discussion of the medical and insurance trend assumptions in the actuarial memorandum. Medical trend is defined as the combined affect of medical provider price increases, utilization changes, medical cost shifting, and new medical procedures and technology.

44. Petitioner adequately justified medical trend to support its rate increase of 40 percent on the subject forms. The rule does not define "adequately justify"; however, the spread sheets submitted by the Petitioner based upon the actual records of claims paid by the Department reveal that 71 percent

    of the payout is for radiation and chemotherapy benefits and that those benefits are increasing at a rate of 35 percent which results in a weighted average of 24.85 percent. The statute does not require an audited statement of the company's books, and the schedules supporting the weighted average of 24.85 percent were introduced at hearing.

45. The third item raised by the Department relates to lapse assumption. The Department's actuary testified at hearing that this was not an adequate grounds for denial.

46. Regarding the fourth item relating to expected claims, the test referenced by the Department only applies to that minority of business issued after June 1, 1994. The test involved requires that anticipated claims cannot be less than 85 percent of the claims projected when the form was originally filed. Rule 1-149.006(4)(a), provides:

    File the "anticipated" loss ratio for each Group Rating Class. This anticipated loss ratio shall be the expected ratio of claims to premiums over the entire future period for which rates are computed to provide coverage

    . . .[.]

    
    

47. The purpose of this test is to insure that the insurer does not set rates too high and retain too much money in unpaid premiums. The figures calculated by Petitioner using the Department's method, show that Petitioner meets the standards.

48. Regarding the Petitioner's failure to provide the durational loss ratio data for the original filing, this was submitted at hearing. As indicated above, although the Petitioner has the obligation to provide up-dates to the original filing, the Department cannot transfer responsibility for "maintaining" records in its possession.

49. The fifth item is also limited to those policies issued after June 1, 1994. This issue relates to the so called

    "N test." The Department objected in part to the Petitioner's failure to provide the original durational loss projects. This argument is addressed above, and found without merit.

50. The data presented at hearing, which was examined by Respondent's expert, was determined to have met the standard.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, Petitioner proved its request for a 40% rate increase.

DONE AND ENTERED this 4th day of November, 1998, in Tallahassee, Leon County, Florida.

STEPHEN F. DEAN

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this 4th day of November, 1998.

COPIES FURNISHED:

Frank J. Santry, Esquire 2833 Remington Green Circle Post Office Box 14129 Tallahassee, Florida 32317

S. Marc Herskovitz, Esquire Department of Insurance

612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-0333

Bill Nelson, Commissioner Department of Insurance

and Treasurer

The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300

Daniel Y. Sumner, General Counsel Department of Insurance

and Treasurer

The Capitol, Lower Level 26 Tallahassee, Florida 32399-0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this recommended order. Any exceptions to this recommended order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 98-002132

Orders for Case No: 98-002132