Cal Insurance Regulation

As reflected by the CDI's request for comments from consumer groups and the industry concerning the prior approval variance regulations, there is a lack of regulatory guidance and/or clarity of how insurers are to prove up grounds for a variance as well as how to quantify a variance once it is determined that one should be given.   This lack of clarity has manifested itself in the current rate application hearings as there are already numerous legal and factual arguments raised concerning these issues.  

This post will be the beginning of a series of posts dealing with the debates that have arisen concerning the proof requirements and standards for obtaining and quantifying variance requests under the rate regulations.

One issue that has risen is what constitutes a qualifying alteration in the "mix of business" that may considered for Variance 1 (10 C.C.R. section 2644.27(f)(1)).  Variance 1 provides:

“That the insurer will alter its mix of business in the rating period from the mix in the recorded period in a manner that affects the maximum and minimum permitted earned premium. Any such representation by the insurer shall specify the precise changes in business operations, shall be supported by a statement of an authorized official of the insurer indicating the manner in which the insurer plans to implement the change, and shall include such substantiating information as the Commissioner may require, including but not limited to specification of changes in the insurer's marketing program and relevant market research. Such representation shall be accompanied by the stipulation by the insurer to refund to consumers in a subsequent rate case if the change fails to materialize.”

In a current rate matter, Allan Schwartz, expert for Intervenor Foundation for Taxpayers and Consumer Rights (the "FTCR"), has argued that this variance only takes into consideration "affirmative" alterations or plans to change an insurer's "mix of business."  In other words, if it is the case that an insurer's "mix of business" simply changed, through no affirmative plan or design by the insurer, that change would be irrelevant for purposes of this variance.  The basis for this contention is the regulation's statement that the insurer "will" alter its mix of business.  By use of the word "will," the FTCR contends that this variance only applies to future planned changes to the mix of business.

It is questionable whether Variance 1 or the word "will" should be read in such a limited fashion.  Variance 1 provides a basis for seeking a variance on grounds that there is a change in an insurer's "mix of business."   Whether it is by a new formalized company strategy or whether is it part of company's evolving practices, it is always the case that a change in the "mix of business" is always by "will"  of the insurer.

Further, it is illogical that an insured can obtain a variance under Variance 1  for planned, but as yet undetermined and unverified changes of businesses, but it cannot obtain a variance  where there are actual changes in the mix, which can be measured and relied upon in assessing a need for a variance and the degree of that need.   If it is contemplated that an insurer can get rate relief for planned future changes, it must also be the case that the regulations also provide for that relief for actual changes that are taking place in an insurer's "mix of business."

Significantly, the Insurance Commissioner has also expressed his own understanding that actual changes in the mix of business would be taken into consideration under this variance.  In response to a comment leading up to the adoption of the prior approval regulations that "a variance should be added where there is 'rapid growth or reduction in a book of business," the Commissioner stated that "[t]he situation as described in the comment would be likely addressed by the variance set forth in section 2644.27(f)(1).'"

As yet, there has been no determination on this particular issue, although it is one that will certainly be addressed within the next month or so, whether in a hearing or by promulgation of further regulations by the CDI.