California Code of Regulations
Title 10 - Investment
Chapter 5 - Insurance Commissioner
Subchapter 4.8 - Review of Rates
Article 4 - Determination of Reasonable Rates
Section 2644.12 - Efficiency Standard
Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) The Commissioner shall calculate the efficiency standard annually, within 45 days of the publication of the necessary source data, which shall be expressed as a maximum allowable ratio of historic underwriting expenses, including adjusting and other expenses, to historic earned premiums, which represents the fixed and variable cost for a reasonably efficient insurer to provide insurance and to render good service to its customers.
(b) The efficiency standard shall be set separately for each insurance line, and separately for insurers distributing through independent agents and brokers, through exclusive agents, and through employees of the insurer selling insurance on a direct basis. For an insurer using more than one distribution system, the efficiency standard shall consist of an average weighted by earned premium for each distribution system. In setting the efficiency standard, the Commissioner shall determine whether, in the long-term, efficiency will be enhanced and premiums lowered by adopting a separate standard for insurers writing large and small amounts of insurance in the line. If the Commissioner determines that such separate standards would have such long-term effects, the Commissioner shall set the standard separately according to the amount of insurance being written in the line, pursuant to section 2646.3. In lines where the number of insurers employing a given distribution system is, in the judgment of the Commissioner, inadequate for the calculation of a mean that provides a useful efficiency standard, the Commissioner shall adopt a single efficiency standard for that line, pursuant to section 2646.3, which shall apply to all insurers writing in that line regardless of distribution system. For lines of business that combine personal and commercial exposures, the commissioner may set separate efficiency standards, pursuant to section 2646.3.
(c) The efficiency standard shall be calculated as the arithmetic average of the latest three years for which data are available.
(d) For farmowners, the efficiency standard for captive insurers shall be the average for all distribution systems combined.
(e) For earthquake, the efficiency standard shall exclude adjusting and other expenses. Adjusting and other expenses shall be added to defense and cost containment expenses.
(f) For burglary and theft, all distribution systems shall be combined, and a five-year average shall be used.
(g) In each category, the efficiency standard shall be set at the weighted mean (weighted by earned premium in California) expense ratio of insurers in that category. In calculating the average, the Commissioner may exclude insurers for which reliable data are not readily available.
(h) All data shall be taken from the National Association of Insurance Commissioners database of the statutory annual statement state page and of the Insurance Expense Exhibit, Part III.
(i) A company's data shall be included in the calculation only if
(j) If a company's commission expense is less than zero, the negative amount shall be set to zero.
(k) If a company's California allocated other acquisition expense is less than zero, the negative amount shall be set to zero.
(l) If a company's California allocated general expense is less than zero, the negative amount shall be set to zero.
(m) If a company's tax, licenses and fees expense is less than zero, the negative amount shall be set to zero.
(n) Countrywide expenses for general and other acquisition expenses shall be allocated to California on the basis of direct earned premium. Countrywide expenses for adjusting and other expenses shall be allocated to California on the basis of direct incurred losses.
1. New section
filed 8-13-91 as an emergency; operative 8-13-91 (Register 92, No. 3). A Certificate
of Compliance must be transmitted to OAL 12-11-91 or emergency language will be
repealed by operation of law on the following day.
2. Repealed by
operation of Government Code section
11346.1(g)
(Register 92, No. 15).
3. New section refiled 2-14-92 as an emergency;
operative 2-14-92 (Register 92, No. 15). A Certificate of Compliance must be
transmittted to OAL 6-15-92 or emergency language will be repealed by operation of
law on the following day.
4. Repealed by operation of Government Code
section
11346.1(g)
and new section filed 3-15-95; operative 3-15-95. Submitted to OAL for printing only
pursuant to Government Code section
11343(a)(1)
(Register 95, No. 11).
5. Repealer of subsections (a)-(a)(3)(D),
subsection relettering, amendment of newly designated subsections (a), (b) and (d)
and new subsections (c) and (e)-(k) filed 1-3-2007; operative 4-3-2007. Submitted to
OAL for printing only pursuant to Government Code section
11340.9(g)
(Register 2007, No. 1).
6. New subsections (d)-(f), subsection
relettering and amendment of newly designated subsection (n) filed 5-16-2008;
operative 5-16-2008. Submitted to OAL for printing only pursuant to Government Code
section
11340.9(g)
(Register 2008, No. 20).
7. Change without regulatory effect amending
subsection (b) filed 7-14-2021 pursuant to section
100, title 1, California Code of
Regulations (Register 2021, No. 29). Filing deadline specified in Government Code
section
11349.3(a)
extended 60 calendar days pursuant to Executive Order
N-40-20.
Note: Authority cited: Sections 1861.01 and 1861.05, Insurance Code; and 20th Century v. Garamendi, 8 Cal.4th 216 (1994). Reference: Sections 1861.01 and 1861.05, Insurance Code; and Calfarm Insurance Company v. Deukmejian (1989) 48 Cal.3d 805.
