Potential Changes to Prior Approval Regulations for Property/Casualty Insurers Under Consideration by California Department of Insurance

By Robert W. Hogeboom, Samuel Sorich and Steven Weinstein

On November 10, 2011, the California Department of Insurance (“CDI” or “Department”) conducted a workshop to consider potential changes to regulations that govern prior approval of property/casualty insurance rates and class plan applications. The list of topics discussed at the workshop is included in the CDI Notice of Workshop Regarding the Scope of Prior Approval dated September 21, 2011.

The workshop grew out of the 2010 MacKay v. Superior Court case in which the court held, among other things, that Insurance Code Section 1860.1 exempts approved rates from civil actions and that such rates are subject only to a limited prospective challenge by administrative procedure (under Insurance Code Section 1858 et seq.). 

Barger & Wolen was counsel for the prevailing insurer, 21st Century Insurance Company, in MacKay, and our two blogs on the MacKay case can be accessed here and here.

MacKay involved 21st Century’s use of the accident verification factor which plaintiffs asserted was not an approved rating factor, but only an unapproved underwriting guideline.

The court concluded that the “language submitted to the Department for approval” is what is relevant as to whether a guideline is “submitted to the Department as a factor affecting the rates to be charged.” 

Here, though accident verification was contained as an underwriting guideline, the insurer explained the use of accident verification in an exhibit to its rate application as affecting the rates to be charged and had been approved by the Department. 

Based on MacKay, the use of underwriting guidelines was a prominent issue in the workshop.

Heading the workshop from the CDI were General Counsel Adam Cole, Joel Laucher, Chief Deputy of Rate Regulation, and Bryant Henley, Senior Counsel for the Rate Enforcement Bureau. 

While there was an exchange of views among insurer representatives, representatives of consumer groups and the CDI staff, no decisions were made at the workshop.

Mr. Cole announced that interested parties have until December 1, 2011, to submit written comments on the workshop topics.

At that point, the CDI presumably will review the workshop record and determine whether to propose any new regulations relating to the workshop topics.

Following is a summary of the key issues discussed at the workshop:

 1. Whether the terms rating factor, rate, and premium needed to be clarified in order to ensure that every item that makes up the rate is properly disclosed and reviewed by the CDI.

This issue focused primarily on underwriting rules in which a specific rule, such as a “surcharge” or “coverage,” is included in the rate and reviewed by the CDI during rate review.

The CDI asserts that the goal of the CDI is to assume that the consumer and the insurer can rely on the approval.

The CDI raised the issue whether an underwriting rule should be considered a rating factor.

The industry asserts that the terms relating to rate and premium etc. are all well settled by the courts. Further, the industry submits that the rate application process is thoroughly vetted by the CDI, which routinely seeks further information or explanation on all issues that are relevant to the rate application determination.

Consumer Watchdog announced its skepticism that not all factors that make up the rate are always properly disclosed or reviewed by the CDI. It called for new regulations that would assign narrow definitions to the terms “rating factor,” “rate,” and “underwriting guideline.”

In the context of private passenger auto insurance, Consumer Watchdog argued that “rating factor” should mean only the three mandatory factors and the optional rating factors specified in regulations adopted by the insurance commissioner and should not include discounts or surcharges.

Consumer Watchdog advocates a further regulation be adopted to the effect that any price variation from the rating factors is a violation of the statute and that discounts not be allowed.

Barger & Wolen’s Steven Weinstein, and other insurers’ representatives, pointed out that regulatory section 2632.2(a), which defines “rating factor” as any factor which “establishes or affects the rates, premiums, or charges assessed for a policy of automobile insurance,” provides good guidance. 

Weinstein cautioned against narrow definitions that would make the prior approval process inflexible, and which in turn would hurt market competition. Weinstein added that there was no evidence to support the necessity for such changes, and that the CDI indicated that certain underwriting rules, such as surcharges, could affect the rate. 

2. If underwriting rules contain rules which affect the rate, should the underwriting rules be subject to public disclosure and/or prior approval?

Currently, the Department often requests that certain underwriting rules which contain an insurer’s eligibility guidelines are required to be filed as a supporting document to the rate application. In many cases, they are deemed confidential per request of the insurer as proprietary information. The CDI expressed the view that underwriting rules, to the extent they impact the rate, should be made available for public inspection.

Consumer Watchdog argues that Insurance Code Section 1861.07, which provides that all information provided to the commissioner pursuant to the Insurance Code provisions regarding prior approval be made available for public inspection, requires disclosure of underwriting guidelines.

Insurer representatives responded that underwriting guidelines contain trade secrets that have legal protection and that section 1861.07 should not be read that broadly.

An insurer representative described the research and expense that is involved in developing underwriting guidelines. An insurer will not make this kind of investment if its guidelines are made available to the insurer’s competitors.

The disclosure of underwriting guidelines would have devastating effects on insurance competitiveness.

3. What is the effect of a rate approval in which it was based on a rate application that contained an unlawful factor/underwriting rule?

Insurer representatives asserted that the rate application and prior approval process provides full disclosure of an insurer’s proposed rates and class plans. The CDI’s job is to review and rule on the insurer’s changes.

Once the CDI approves the insurer’s changes, the insurer must be able to rely on the CDI’s approval. 

In fact, Insurance Code Section 1861.01(c) prohibits an insurer from charging a rate that has not been preapproved by the CDI. 

Mr. Weinstein reminded the CDI of the California Court of Appeal’s ruling in MacKay v. Superior Court which held that if an approved rate is subsequently found to have been illegal, that finding cannot retroactively invalidate the CDI’s prior approval.

Consumer Watchdog argued that the CDI does not have the authority to approve an illegal rate, and that the Department’s approval of an illegal rate is a nullity and beyond the scope of the CDI’s power.  

Consumer Watchdog furthered argued that the CDI’s authority over rate approvals is not exclusive. It asserted that Proposition 103 requires the CDI to share that authority with consumer representatives.

4. Whether the CDI Should Adopt Procedures for Handling Referrals from Courts

This topic was outlined by the Department’s Adam Cole. 

Mr. Cole explained that there is some confusion about how the CDI should handle cases in which the courts refer to the CDI pursuant to the primary jurisdiction doctrine. Mr. Cole asked whether there is a need for new regulations which would describe how the procedure for handling primary jurisdiction cases differs from the procedure for addressing complaints that are filed under Insurance Code Section 1858. Neither insurer representatives nor consumer representatives expressed support for adoption of regulations on this matter.

5. Additional Topic Raised by Consumer Watchdog Actions that Constitute Approvals

Consumer Watchdog raised a topic that was not included in the workshop notice. Consumer Watchdog argued that the MacKay decision relied on statements from CDI staff to establish that a filing was approved. They called on the CDI to create a system that defines what actions by the CDI staff may be deemed to be “approvals.”

Insurer representatives rejected Consumer Watchdog’s proposal. They pointed out that the proposal would destroy necessary communication between CDI staff and insurers that enables insurers to gain regulatory certainty which results in actions that deliver products and services to consumers. Subjecting this ongoing communication to a formal process for determining the nature of each communication would put insurers and CDI staff into a regulatory straightjacket that would prevent things from getting done.


Rate Regulation Bill Applicable to Health Care Service Plans and Health Insurers Passed by California Assembly

On June 1, 2011, the California State Assembly passed AB 52, which was initially introduced in December 2010.

Beginning January 1, 2012, the bill would require health care service plans and health insurers in California to obtain prior approval from the Department of Managed Health Care or the Department of Insurance for all proposed rate increases.

Under the proposed legislation, the Department of Managed Health Care and the Department of Insurance would be prohibited from approving any rate or rate change that is excessive, inadequate, or unfairly discriminatory. 

In addition, the bill calls for an examination by the Department of Managed Health Care and the Department of Insurance of all rate increases that become effective between January 1, 2011 and December 31, 2011, to ensure that those rates are not excessive, inadequate, or unfairly discriminatory, and to order the refund of any payments made pursuant to any such rate.

The bill must still be approved by the California Senate and signed into law by the Governor in order to become legally operative.

Originally posted on Barger & Wolen's Life, Health and Disability Insurance Law Blog.

Request for Increase in Workers' Comp Cost Benchmark Rejected by Commissioner Poizner

California Insurance Commissioner Requires Overhaul of Workers’ Comp Rate-Making System to Increase Transparency

Citing the inclusion of avoidable costs, California Insurance Commissioner Steve Poizner for the third straight time rejected a filing submitted on behalf of insurers by the Workers’ Compensation Insurance Rating Bureau (“WCIRB”) seeking an increase in the workers’ compensation pure premium rates and claims cost benchmark (“Benchmark”). See this link for Commissioner Poizner’s Decision and Order.

The WCIRB had originally submitted a filing recommending a 29.6% increase, which was subsequently amended to 27.7%. The WCIRB justified the recommended rate increase as warranted primarily because of rising medical costs. This increase would have affected policies with effective dates on or after January 1, 2011. See this link for a summary of the proceedings relating to the WCIRB’s filing.

Pure premium rates reflect the loss (both medical and indemnity) and loss adjustment expense expected to occur on policies. Pure premium rates are a benchmark that insurers can use as a tool for determining their own rates. Pure premium rates have not been increased since January 1, 2009, and this is the third increase in excess of 20% filed by the WCIRB since then.

While the Benchmark is purely advisory and does not set workers’ compensation rates, Commissioner Poizner criticized the requested increase as the Benchmark has in the past allowed insurers to file for and pass on rate increases to businesses.

Calling for transparency and stating that “[t]he workers’ compensation rate-making system is long overdue for some much needed reforms,” Commissioner Poizner also announced three reforms that he believes will significantly improve and inject transparency into the workers’ compensation rate-making process. Under these reforms, the WCIRB will be required to:

  1. calculate future advisory pure premiums based on insurers’ actual, filed rates rather than on theoretical benchmark numbers;
  2. include in each future rate filing a table showing (in addition to industry average numbers) the proposed change for each individual worker classification; and
  3. use California Department of Insurance filing information and data from the WCIRB to evaluate overall workers’ compensation insurer profitability.


Defining "What is a Group?" Under Proposition 103

Notice of California Department of Insurance Workshop

By Robert W. Hogeboom

On Monday, November 11, 2010, the California Department of Insurance (CDI) issued a Notice of Workshop Regarding Affinity Groups Under California Insurance Code Section 1861.12.

The Workshop, scheduled for Friday, December 3, 2010, in San Francisco, deals with group rating programs and the likely need for regulations defining the term “group” for eligibility under Section 1861.12, “which is a part of Proposition 103 and authorizes insurers to issue property and casualty ‘insurance coverage on a group plan.’”

Section 1861.12 does not define the term “group” and does not specify the conditions as to when insurance may be issued on a group plan.  

Barger & Wolen notes that the issue as to “what is a group?” is of major importance to insurers that have submitted group rating plans. It is likely that the CDI will issue regulations with respect to the usage of those plans, and those regulations will likely continue the present policy of ensuring that all of the coverage offered by group members be available and offered to all insureds.

The notice sets forth 13 areas that the CDI will address at the workshop and invites written comments to be submitted prior to the close of business on December 3, 2010:

  • What is the most appropriate definition for the word “group” as used in Section 1861.12?
  • Should insurers be allowed to issue insurance on a group plan for groups such as those based on shared characteristics or status, even if the group has no membership requirements?
  • Should groups have to exist for a particular purpose other than the purpose of purchasing insurance?
  • Should insurers be permitted to form groups solely for the purpose of allowing consumers to purchase insurance at a group rate?
  • To what extent if any, do the auto rating factors found in Section 1861.02(a)(4) and California Code of Regulations 2632.5 impact what groups may be allowable under Section 1861.12?
  • How should group membership be determined?  Should there be eligibility requirements for “membership” in a group, such as payment of dues or voluntarily joining the group?
  • Should an insurer ever be required to confirm group membership of an applicant who claims to be a member of a group?  What should be required and under what circumstances?
  • Should an insurer be required to have a formal agreement with a group before issuing insurance for the group on a group plan?
  • Should an insurer that offers group rates be required to notify/offer every insured/applicant of every group rate available?  How often – at every renewal?
  • Should an insurer be required to discontinue a group rate for an individual when the insured leaves the group of otherwise becomes ineligible for the group rate?  What should the insurer have to do to confirm that the insured receiving the group rate remains eligible from one policy period to the next?
  • What should be required to establish an initial rate for a new group that has no experience data to support a rate differential?
  • What should be required to demonstrate that the group rate is justified as experience for the group develops?
  • Should there be a mandatory re-filing period when an insurer makes a new group filing with no experience data?

Written comment should be submitted by e-mail to the Group Regulations Inbox at Comments.2010-00018@insurance.ca.gov before the close of business on Friday, December 3, 2010.


Friday, December 3, 2010

10:00 a.m.

California Department of Insurance

45 Fremont Street, 22nd Floor Hearing Room

San Francisco, CA 94105

For more information, contact Robert Hogeboom at rhogeboom@bargerwolen.com or 213.614.7304.

California Department of Insurance Requests Insurers to Submit Rate Decrease Application Filings

by Robert W. Hogeboom

The California Department of Insurance (CDI) Rate Regulation Division has recently issued a first round of letters to insurers requesting that they submit rate decrease applications. All Proposition 103 lines are affected. 

Because many insurers have not recently filed rate applications, the California Rate Division suspects that due to a trend of lower loss ratios, that many insurers may be charging excessive rates.

The CDI is requesting insurers to submit rate filings and advise them of the time frame to submit the filing and threatens that if the insurer does not comply, the CDI will issue an Order to Show Cause or a mandatory request for the filing.

We have questioned the CDI's authority to mandate the submission of rate application filings. 

For more information, please view the full client alert here (pdf).

California Department of Insurance to Implement Outside Actuarial Reviews for All Major Health Insurer Rate Increases

California Department of Insurance Commissioner, Steve Poizner, issued a press release today indicating that the Department has retained an outside actuarial firm to analyze regulatory rate change filings made with the Department by the four major health insurers in the individual market – Anthem Blue Cross, Aetna, Health Net, and Blue Shield of California

The purpose of the independent actuarial analysis is to ensure that health insurers, in raising their premium rates, comply with state law mandating that 70 cents of every dollar collected in health insurance premiums are to be spent on medical benefits.

In February 2010, after the Department received Anthem Blue Cross’ proposed rate change filing indicating that it was seeking to increase individual rates by up to 39%, Commissioner Poizner took the unprecedented step of requesting that an outside actuarial firm analyze the proposed rate increase to ensure that Anthem Blue Cross’ actuarial assumptions were justified and that it complied with the 70 cents on the dollar state law mandate. 

The Commissioner indicated at that time in a letter to Anthem’s parent, Wellpoint, Inc., that

[i]f the independent actuary concludes that Anthem’s assumptions are unjustified and that Anthem will pay out less than 70 cents of the premium dollar for benefits, I will take immediate action to stop Anthem from charging the increased rates to California consumers.”

On April 28, 2010, Axene Health Partners, LLC (“Axene”), the actuarial firm retained by the Department to analyze Anthem’s rate change filing, issued a report containing its findings. In short, Axene found that Anthem’s actuarial calculations and methodology were flawed which resulted in inflated total lifetime loss ratios. This, in turn, resulted in a finding by the Department that Anthem had attempted to charge consumers 50% more than state law allows. In response to these findings, Anthem withdrew its rate change filing.

The press release issued today by the Department indicates that, in light of Axene’s findings with respect to Anthem’s rate change filing, the Department will require that, in addition to the actuarial review conducted internally by the Department, the four major health insurers’ rate change filings be scrutinized by an outside actuarial firm to ensure accuracy and compliance with state law.  

Currently, Axene is reviewing rate change filings made by Aetna and Blue Shield, and will no doubt be reviewing Anthem’s anticipated rate change re-filing, as well as any future rate change filings made by Health Net.