ORDERS:
DECISION AND ORDER
This action involves a homeowner's property and casualty insurance premium rate increase
request filed by Auto-Owners Insurance Company ("Auto-Owners") with the South Carolina
Department of Insurance ("Department") on March 4, 1996. The filing seeks approval of a
modification of rates used for homeowners', renters' and condominium owners' insurance policies
issued in South Carolina resulting in an overall premium level increase of +3.5%.
A hearing was held on May 30, 1996 at the Administrative Law Judge Division to receive
evidence and testimony concerning Auto-Owners request. The Consumer Advocate protested the
rate increase. However, the request was not contested by the Department of Insurance or any
member of the public. I conclude that the requested rate modifications should be approved and
make the following findings of fact and conclusions of law.
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 find:
1. The last insurance rate increase received by Auto-Owners for its homeowners' business was on
February 7, 1995.
2. On or about March 4, 1996, Auto-Owners filed with the Department its request for rate
revisions in its homeowners' program, accompanied by a filing memorandum and supporting
exhibits. On March 6, 1996, the Department, after initial review of the filing, requested
Auto-Owners to provide additional information justifying the use of a 7.4% profit and
contingency factor and supplying a detailed calculation of the rate of return analysis described in
its original filing exhibits. On March 20, 1996, Auto-Owners submitted the additional requested
information and/or exhibits to the Department. (Respondent's Exhibit 2).
3. On or about March 7, 1996, the Department filed a request for a contested case hearing with
the Administrative Law Judge Division ("Division"). On April 11, 1996, the Division issued its
Notice of Hearing, setting the matter to be heard May 30, 1996. Public notice of the hearing was
published in five (5) daily newspapers of general circulation within the State more than thirty (30)
days in advance of the scheduled hearing date. (Respondent's Exhibit 1).
4. On April 18, 1996, Philip S. Porter, Consumer Advocate for the State of South Carolina
("Consumer Advocate"), filed a Motion for Leave to Intervene. On April 24, 1996, the
Consumer Advocate's Motion was granted and he was admitted as an additional Respondent and
accorded all rights of a party to this action.
5. Auto-Owners' projected South Carolina loss ratio is 66.7%. Auto-Owners' South Carolina
permissible loss ratio is 64.0%. Therefore, the Auto-Owners indicated rate change for South
Carolina is a +4.2% increase in overall premium level. However, Auto-Owners limited its
requested increase to +3.5% so as to maintain its competitive position in the homeowners'
insurance market.
6. Ms. Jill A. Raike, Assistant Manager of Auto-Owners Personal Property Actuarial Department
supervised and directed the filing materials and exhibits in support of Auto-Owners rate increase.
Ms. Raike testified that the data reflected in the filing exhibits was true and accurate, based upon
Auto-Owners' own financial data, as reflected for the most part by its Annual Statements filed
with the Department of Insurance. She further testified that all of the data adjustments utilized in
the filing reflected generally accepted actuarial techniques and rate-making methodologies. Martin
M. Simons, Deputy Director and Chief Actuary of the South Carolina Department of Insurance,
testified on behalf of the Department as its expert witness. Mr. Simons, who was qualified as an
expert actuary, independently reviewed Auto-Owners' filing materials. Both Ms. Raike and Mr.
Simons testified that it was their opinion that the proposed filing, if approved, would produce
rates which were not excessive, inadequate or unfairly discriminatory and otherwise in compliance
with all South Carolina statutory directives.
7. The Consumer Advocate questioned three facets of Auto-Owners' filing: (1) justification for
the use of a +7.4% profit and contingency factor; (2) Auto-Owners' use of a 18.5 year
catastrophe experience period to derive the catastrophe factor used in its rate-making
methodology; and (3) Auto-Owners' separate treatment of unrecoverable catastrophe reinsurance
premium expense costs as an expense component of the rate determination. However, the
Consumer Advocate, after raising its concerns regarding the three specific areas of the filing,
presented no witnesses or exhibits to rebut the explanations supplied by Auto-Owners and the
Department.
8. Auto-Owners seeks a target rate of return on surplus of fifteen (15%) percent. The +7.4%
profit and contingency factor was required to achieve that target rate of return. Mr. Martin M.
Simons, Deputy Director and Chief Actuary of the South Carolina Department of Insurance,
cautioned that a rate of return on surplus for an insurer cannot be directly equated with rates of
return on equity for other industries because of the required use by insurers of statutory
accounting principles defining surplus differently and expending certain surplus items so as to
reduce the "equity" available as a basis for the targeted rate of return. Under generally accepted
accounting principals (GAAP), a target rate of return on surplus of 15% would equate to a return
on equity of a lesser amount, in the range of 12.6%. It is appropriate and reasonable for
Auto-Owners to utilize a one to one premium to surplus ratio in developing its rate indication
since Auto-Owners' actual premium to surplus ratio was .9 to 1 and represented a sufficient
justification for the target rate of return during the period of the proposed rate's intended use.
Furthermore, any reliance on historical industry average rates of return on surplus during the past
ten years, as suggested by the Consumer Advocate, utilized a period during which the industry
had suffered more and greater catastrophe losses than any other ten-year period in history,
consequently furnishing an inappropriate comparison. Therefore, Auto-Owners' use of a target
rate of return on surplus of 15% is both reasonable and consistent with the underlying target rates
of return (14%-16%) for most insurers. A 15% rate of return on surplus for Auto-Owners
provides reasonable financial stability to meet future contingencies, pay future losses and maintain
its surplus position.
9. The catastrophe experience period used in the filing was based upon company specific data
which had only been captured for 18.5 years. While use of a twenty-year period for computing a
catastrophe factor would bolster statistical credibility, the use of company specific data
nonetheless provides a more realistic and actuarially acceptable view of Auto-Owners' actual
catastrophe experience and exposures. Use of a factor developed by its own catastrophe
experience is preferable to industry averages incorporating dissimilar experience of other insurers
and states not exposed to the types of catastrophe losses experienced by Auto-Owners. Further,
use of the company's actual data addressed the specific demographics of Auto-Owners' book of
business and provided a reasonable assurance of financial soundness in the event of a future
catastrophe. Therefore, use of the actual data, even if for only 18.5 years, was reasonable, sound
and did not produce an excessive rate.
10. The treatment of unrecoverable catastrophe reinsurance premium costs associated with
homeowners' exposures represented a segregation of two catastrophe loss components--those
recoverable through catastrophe loss load factors and those unrecoverable as a cost of acquiring
catastrophe reinsurance. Auto-Owners' methodology was designed to capture the increasing costs
of catastrophe reinsurance that otherwise had produced market availability problems. Mr. Simons
explained that while recoverable catastrophe losses were accounted for by the development of the
catastrophe factor, traditional rate-making methodology has previously ignored the significant
impact that the unrecoverable costs of acquiring catastrophe reinsurance could have on
homeowners' insurance availability. In part as a result of recent catastrophe loss experiences
within the insurance industry, the cost of catastrophe reinsurance has increased. These increases,
if not recognized in rate-making, produce significant market restrictions and availability problems
as evidenced in South Carolina by the number of insurers leaving the homeowners' market,
restricting coastal writings or refusing to write insurance in coastal areas subject to catastrophic
windstorm losses such as the losses produced by Hurricanes Hugo and Andrew. Therefore, the
allocation of 30 percent of catastrophe reinsurance premiums as an unrecoverable cost for
commissions and other expenses of the reinsurer is a reasonable and actuarially acceptable method
of evaluating property and casualty insurance rates in lines such as homeowners' insurance which
were substantially impacted by catastrophe reinsurance costs. Furthermore, this methodology
assures consumers of full availability for homeowners' insurance in coastal areas of the State.
11. The resulting rate utilized for Auto-Owners' target market would be reasonable and
competitive in relation to the rates presently charged by other homeowners' carriers doing
business in South Carolina.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude, as a matter of law, the following:
1. This is a contested case action as defined by S.C. Code Ann. § 1-23-310 (Supp. 1995) and
involves a rate application requiring a hearing prior to approval pursuant to S.C. Code Ann. §
38-73-910 (Supp. 1995). As such, subject matter jurisdiction is vested in the Administrative Law
Judge Division by virtue of S.C. Code Ann. § 1-23-600(B) (Supp. 1995).
2. A request for an insurance rate increase is governed by S.C. Code Ann.§§ 38-73-10 et seq.
(Supp. 1995). The burden of proof imposed upon the Petitioner in this homeowners' property and
casualty insurance premium rate increase request is that, by the preponderance of the evidence,
the resulting homeowners' premium rates are not excessive, inadequate or unfairly discriminatory.
S.C. Code Ann. § 38-73-10 (a)(1)(Supp. 1995); S.C. Code Ann. § 38-73-430 (Supp. 1995). The
Petitioner has sufficiently established that the increase in premium rates is not excessive,
inadequate, or unfairly discriminatory.
3. Pursuant to S.C. Code Ann. § 38-73-910 (Supp. 1995), notice of the filing and of the public
hearing must be published in all newspapers of statewide circulation at least 30 days in advance of
the hearing.
4. S. C. Code Ann. § 38-73-920 (Supp. 1995) prohibits an insurer from receiving an insurance
premium rate increase in any line of insurance or in any type of insurance for which a rate increase
has been granted within the preceding twelve months. Since, the last insurance rate increase
received by Auto-Owners for its homeowners' business was on February 7, 1995, any insurance
premium rate increase approved by this Order may become effective immediately.
ORDER
IT IS THEREFORE ORDERED, that the insurance rate increase requested by Auto-Owners in
the filing is approved. The effective date of the increase shall not occur before the date of this
Order.
AND IT IS SO ORDERED.
_______________________________
Ralph King Anderson, III
Administrative Law Judge
Columbia, South Carolina
June 7, 1996 |