SC Administrative Law Court Decisions

This matter comes before me pursuant to S.C. Code Ann. §§ 38-73-910 et seq. (Rev.1989 & Supp.1998) and S.C. Code Ann. §§1-23-310 et seq. (Rev.1986 & Supp.1998) on Petitioner's request for a rate increase of its homeowners property and casualty insurance premium.

STATEMENT OF CASE

Nationwide Mutual Fire Insurance Company (hereinafter "Nationwide") made a filing with the Director of the South Carolina Department of Insurance requesting a rate increase of 5.2% for its homeowner's insurance program on May 3, 1999.

The hearing on this matter was held before me on September 10, 1999.

Present at the hearing were Anne D. Saxon, Esq. and James C. Gray, Jr., Esq. representing Nationwide; Jeffrey Shirazi, Senior Actuary, Nationwide; T. Douglas Concannon, Esq., Associate General Counsel, representing the South Carolina Department of Insurance; Dean F. Kruger, Forms and Rates Director, South Carolina Department of Insurance; Hana Williamson, Esq., representing the Office of the Consumer Advocate; and Daniel Goldstein, Esq., representing himself as Intervenor.

From testimony, exhibits and arguments presented at the hearing, I find and conclude as follows:

FINDINGS OF FACT

Having carefully considered all testimony, evidence and arguments presented at the hearing in this matter, by a preponderance of the evidence, I make the following findings of fact related to the requested rate increase for the homeowner's property and casualty insurance program:

1. Respondent published notice advising the public that an application for the establishment of rates by Nationwide had been made in The State, The Greenville News, The Charleston Post and Courier, The Rock Hill Herald and The Darlington News and Press. The Court opened the hearing on September 10, 1999, and no members of the public appeared and asked to speak.

2. The homeowners rate filing was prepared under the supervision of Jeffrey Shirazi.

3. Mr. Shirazi is employed by Nationwide, where he is a Senior Actuary in the Actuarial Department of that company with nine years of experience at Nationwide.

4. Mr. Shirazi has a Bachelor of Arts degree in Mathematics and Physics from Miami of Ohio, graduating in 1990. He is a Fellow in the Casualty Actuarial Society and a member of the American Academy of Actuaries.

5. Mr. Shirazi's job responsibilities include the directing of the ratemaking activities for Nationwide in three states, including South Carolina.

6. Mr. Shirazi was qualified without objection as an expert in actuarial science and ratemaking.

7. The nature of the line of insurance for which this rate increase is being requested is Nationwide's Homeowners policy, which is a broad package policy, providing coverage for accidental direct damage to insured property and for the insured's liability for bodily injury and property damage.

8. Nationwide is requesting an overall rate increase of 5.2% for Nationwide's homeowners line of business, with requested effective dates no sooner than October 1, 1999.

9. The rate revision includes changes to Nationwide's rating zones and changes to the basic premiums with the proposed rate changes varying by policy form, rating zone, amount of insurance, and deductible option.

10. The filing contains an amendment providing notice to the insureds of proposed changes in hurricane deductibles and earthquake deductibles.

11. All of these changes are described in detail in the Explanatory Memorandum included in Petitioner's filing. The filing contains the necessary evidence and basis for the matters discussed herein and the matters which are not contested in this proceeding.

12. The basis for Nationwide's requested rate increase is as follows. The result of Nationwide's analysis of South Carolina Homeowners experience is an overall indicated rate increase of 10% as shown on Exhibit I-B of the filing.

13. The Nationwide rate request was judged by the standards set forth in the South Carolina Insurance Code, at section 38-73-330, providing that rates may not be excessive, inadequate, or unfairly discriminatory. The rates produced by Nationwide's rate request were determined using generally accepted actuarial techniques and meet the statutory standards in South Carolina.

14. Ratemaking Principles state that a rate is an estimate of the expected value of future costs.

15. Nationwide's indicated rate level adjustment is developed on Exhibit I-A and Exhibit I-B of the rate filing. This Exhibit displays the expected value of Nationwide's estimated future costs, non-weather losses, expenses, and the cost of capital as reflected in Nationwide's selected underwriting profit provision. These costs are then related to Nationwide's projected premium income at the current rate level.

CONTESTED ISSUES

16. The main issues of contention in this filing are: (1) whether the filing meets the statutory standards; (2) whether the coastal territorial premium changes were justified; and (3) whether the use of a percentage as opposed to flat deductibles for the wind and hail peril was appropriate.

NON-WEATHER PROVISION

17. The non-weather incurred loss estimate was derived as follows. First, Nationwide estimated the non-weather loss per policy based on an in-depth analysis of the development of historical incurred loss per policy. Filing Exhibit I-A shows the historical data through 1997 as well as the trended values.

18. Allocated Loss Adjustment Expenses (ALAE) are incurred in investigating and settling certain specifically identified claims. Unallocated Loss Adjustment Expenses (ULAE) are those incurred in investigating and settling claims that are not directly assigned to specific claims, such as expenses associated with running and maintaining Nationwide's Claims Service Centers and salaries for claims adjusters and management. (See testimony of Shirazi.) Loss adjustment expenses are reflected in the data found in Exhibit I-A.

WEATHER PROVISION

19. Weather losses by nature are large and fortuitous events that cause widespread property damage. This type of loss occurs less often than the non-weather losses described above. It is appropriate to include a provision for weather losses in Nationwide's rates to cover the long-term cost of these events. This long-term provision is determined by analyzing the historical weather loss experience and calculating a provision in the rates. (See Filing Exhibit II.)

20. When looking at annual weather losses, it is clear that some years will incur substantial weather losses (such as 1989 with Hurricane Hugo) while other years may see no such catastrophic events. That is why Nationwide includes a provision to cover weather losses in the long-run, to eliminate the year-to-year fluctuation in the rates that would occur if Nationwide determined their weather provision based on the most recent year or two of weather losses. (See testimony of Kruger and Shirazi.)

21. The weather provision consists of two components: non-hurricane (tornadoes, windstorms, winter storms, freezing) and hurricane. (See testimony of Shirazi).

22. Nationwide capped individual territorial changes to 25%. (See Filing Exhibit VII, Revised.)

23. Nationwide's method for developing the weather loss provision has been recognized in many states as actuarially sound. (See testimony of Shirazi.) Models have become the prevelant method for prediction of storm losses since Hurricane Andrew. (See testimony of Kruger.)

24. The Nationwide model utilizes data from 100 years of hurricane events. The model includes South Carolina data. The model is provided by Applied Insurance Research. The model is applied to Nationwide's South Carolina exposure. (See testimony of Shirazi.)

25. Nationwide's provision for non-hurricane losses and LAE is actuarially sound and reasonable. (See testimony of Shirazi and Kruger.)

26. Nationwide's provision for hurricane losses and LAE is actuarially sound and reasonable; and the amount Nationwide has included in this year's South Carolina homeowners filing is reasonable. (See testimony of Shirazi and Kruger.)

TERRITORIAL CHANGES

27. The overall rate change is distributed through territorial changes. Undisputed 'expert testimony and data in the filing indicated that the territorial changes were appropriate. The Petitioner capped the changes whenever the impact would exceed 25%.

28. The expert testimony in support of these territorial changes was undisputed.

UNDERWRITING PROFIT AND CONTINGENCY PROVISION

29. Nationwide included an underwriting profit and contingency provision equal to 5% of earned premium based upon Nationwide's analysis of the cost of capital in its filing. (See Filing Exhibit IV.)

30. The components of the provision for the cost of capital in the rate calculation are as follows. The cost of capital is the amount necessary to provide the company with an after-tax total rate of return commensurate with the risk to which capital is exposed. The return to the insurance company comes from three sources: (1) Underwriting Profit; (2) Investment Income; and (3) Capital Gains. (See Filing Exhibit IV.)

31. The total rate of return is stated as a percentage of surplus. The rate of return set in the filing is 8.4%.

32. Based on Nationwide's estimates of premiums, losses, and expenses, and taking into consideration a reasonable provision for underwriting profit and contingencies, Nationwide's indicated rate level change for the South Carolina Homeowners program is a 10% increase. Nationwide proposes an overall 5.2% increase. The indicated rate changes were calculated using accepted actuarial techniques, which have been used and approved in prior filings in this state. These techniques are in compliance with South Carolina law.

DEDUCTIBLES

33. The intervenor, Daniel Goldstein, objected to percentage deductibles for the windstorm and hail peril.

34. These deductibles in the filing vary by territory on the coast only from 1% to 2%. The proposed premiums reflect a credit for the windstorm deductible. (See testimony of Shirazi.)

35. No evidence was introduced against the proposed deductibles. Expert testimony of Shirazi and Kruger indicated that the deductibles were appropriate.

DEPARTMENT OF INSURANCE'S INDEPENDENT REVIEW OF FILING

36. Based on these facts, the State Department of Insurance did not oppose the rate increase for the homeowners program.

37. Dean Kruger, the Forms and Rates Director of the South Carolina Department of Insurance, testified for the Department of Insurance. (Testimony of Kruger.)

38. Mr. Kruger is responsible for the approval of all property casualty insurance rates, forms, and rules in South Carolina. (See testimony of Kruger.)

39. Mr. Kruger has worked at the department for nine years. (See testimony of Kruger.)

40. Mr. Kruger has reviewed thousands of insurance rate filings over the course of his professional career. (See testimony of Kruger.)

41. Mr. Kruger was qualified without objection as an expert in ratemaking.

42. In addition to the persuasive testimony by Petitioner, Mr. Kruger's expert testimony established that Petitioner's filing satisfied the statutory standards in every respect.

43. Mr. Kruger's review of this filing involved his review of the filing to determine if the assumptions and the calculations contained in the filing were reasonable and whether the 5.2% overall increase as derived from those calculations in the filing would produce rates that were not excessive, inadequate or unfairly discriminatory. (See testimony of Kruger.)

CONCLUSIONS OF LAW

Based upon the foregoing Findings of Fact, I conclude, as a matter of law, the following:

1. The South Carolina Administrative Law Judge Division is empowered to hear this case pursuant to S.C. Code Ann. § 38-73-910 and S.C. Code Ann. § 1-23-320, as amended.

2. The law governing the making of rates is well defined. Insurance rates are regulated under Title 38 of the South Carolina Code of Laws, 1976, as amended. The pertinent statutory requirement is that rates may not be excessive, inadequate or unfairly discriminatory. S.C. Code Ann. Section 38-73-330(2).

3. The Administrative Law Judge's powers are granted by the Administrative Procedures Act, S.C. Code Ann. §§ 1-23-310 et seq., (APA), and the standards of administrative and judicial review of the rate filing are set forth in the Insurance Code by virtue of the law requiring that no rate may be excessive, inadequate, or unfairly discriminatory. § 38-73-330(2) (Supp. 1995). The filer must simply prove that the standard is met by a preponderance of the evidence.

4. Section 1-23-350 of the Act sets forth the ALJ's powers to make findings of fact and conclusions of law. § 1-23-350 (Rev. 1986). The ALJ's findings and conclusions are to be separately stated in writing in a final decision or order. Id. A concise and explicit statement of the underlying facts supporting the findings must accompany all findings of fact set forth in statutory language. Id. The findings of fact must be based exclusively on the evidence and on matters officially noticed. § 1-23-320(i) (Supp. 1998).

5. Pursuant to S.C. Code Ann. § 38-73-910, notice of the filing and of the public hearing was given in all newspapers of statewide circulation at least 30 days in advance of the hearing.

6. Pursuant to the responsibilities charged to the Department of Insurance, an independent investigation was made of the proposed filing. All findings of fact are based exclusively on the evidence and on matters officially noticed. S.C. Code Ann. § 1-23-320. Due consideration has been given to the numerous exhibits and extensive testimony in the record.

7. Nationwide's expert witness, Jeffrey Shirazi, and the expert witness of the Department of Insurance, Dean Kruger, were credible on the fundamental issues that the Court must consider in determining whether the requested rates and deductibles are excessive in this rate filing.

8. In addition, the South Carolina Consumer Advocate and its retained actuary reviewed the filing and do not oppose it. The Consumer Advocate also reviewed the form of notices associated with the deductibles and other changes. (See Petitioner's Exhibit 1 from the Hearing.)

9. The Department of Insurance's expert actuary, Dean Kruger, testified in favor of Nationwide's requested rate increase. The General Assembly has delegated its legislative power to supervise and regulate the rates of insurance companies to the Director of the South Carolina Department of Insurance. S.C. Code Ann. § 38-3-110.

10. As the Department's expert, Kruger's "experience, technical competence, and specialized knowledge may be utilized in the evaluation of the evidence." S.C. Code Ann. § 1-23-330(4). Kruger testified that Nationwide's filing were reasonable with respect to deductibles, territorial changes, and rates and met the statutory standards.

11. The testimony of the two experts who were present at the hearing and qualified as experts both testified that the filing met all statutory standards, which testimony was undisputed.

12. Nationwide met the burden of proof in this rate increase request by establishing by a preponderance of the evidence that the revised rates would not be excessive, inadequate, or unfairly discriminatory and that the filing was otherwise in compliance with law. S.C. Code Ann. § 38-73-330(2).

CONCLUSION

I, THEREFORE, CONCLUDE that the proposed rates meet all statutory requirements and are, therefore, approved effective October 1, 1999, or as soon thereafter as the Petitioner may implement the changes.

_______________________

John D. Geathers

Administrative Law Judge

Columbia, South Carolina

October 8, 1999