Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) A request
that the maximum permitted earned premium or minimum permitted earned premium should
be adjusted is referred to as a "variance request."
(b) Requests for variances shall be filed with the
Rate Filing Bureau on pages 11a and 11b of the Prior Approval Rate Application. All
such variance requests shall specifically:
(i)
identify each and every variance request;
(ii) identify the extent or amount of the variance
requested and the applicable component of the ratemaking formula;
(iii) set forth the expected result or impact on
the maximum and minimum permitted earned premium that the granting of the variance
will have as compared to the expected result if the variance is denied;
and
(iv) identify the facts and their
source justifying the variance request and provide the documentation supporting the
amount of the change to the component of the ratemaking formula.
(c) Requests for variances shall be filed at the
same time as the prior approval application to which it applies or after the filing
of the rate application and before any final determination regarding that
application. Public notice of all variance requests shall be provided as set forth
in California Insurance Code Sections
1861.05(c)
and
1861.06.
(d) A variance request shall be deemed approved
sixty days after public notice unless:
(i) a
consumer or a consumer's representative requests a hearing within forty-five days of
public notice and the Commissioner grants the hearing, or determines not to grant
the hearing and issues written findings in support of that decision, or
(ii) the Commissioner on the Commissioner's own
motion determines to hold a hearing.
(e) Variance requests shall be determined in
conjunction with the related prior approval application or rate hearing
thereon.
(f) The following are the valid
bases for requesting a variance:
(1) That the
insurer should be allowed relief from the efficiency standard for bona fide
loss-prevention and loss-reduction activities as set forth below.
(A) The insurer meeting the qualifications set
forth below may obtain an increase in the applicable efficiency standard by the
amount of its "Allocated Costs" for its Special Investigations Unit ("SIU") expense
for the most recent year. The term SIU as used in this section has the same meaning
as that term has in Section
2698.30(o). The term
"Allocated Costs" means those costs set forth in subsection (iii) and attributable
to investigations of claims made on the line of insurance subject to Insurance Code
section
1861.05(b)
for which the variance is sought.
(i) An insurer
may recover its "Allocated Costs" for its SIU expenses only in its approved rate
filing for the line of insurance affected by the SIU investigation costs.
(ii) Affiliated insurers who utilize the same SIU
unit may recover the portion of their "Allocated Costs" for their SIU expenses
attributable to investigations of claims made on the line of insurance in the rate
application only in one approved rate application for the line affected by the
Allocated SIU costs. The term "Affiliated Insurers" has the same meaning as that
term has in Insurance Code Section
1215.
(iii) The only recoverable SIU expenses are those
expended for investigators whose sole duties are investigation of insurance fraud,
software dedicated solely to analysis of data for indications of insurance fraud,
training of employees whose sole duty is the investigation of fraud and equipment to
be used solely by the insurer's SIU. The recoverable expenses do not include the
costs of employing or other costs for adjustors or underwriters.
(iv) The only recoverable SIU expenses are for
SIU's dedicated to investigation of insurance fraud within the State of California
or for the portion of an SIU's operations within California. The burden of
demonstrating the amount of SIU expenses, and that those expenses are for the
investigation of insurance fraud within the State of California is the
insurers.
(v) An insurer may recover the
"Allocated Costs" of retaining an independent contractor to perform SIU services as
described in sub-paragraph (iii). The variance shall be calculated by multiplying
the fees paid for the independent agency with whom the insurer contracts by the
percentage of referrals of claims made on the line of insurance for which the rate
application and variance application are made and that the contracted agency
investigates in California on behalf of the insurer seeking the variance.
(vi) No expense that is included within the
Defense and Cost Containment Expense portion of an insurer's rate application can be
included in whole or in part as the basis for a variance based on SIU expenses. The
terms "Defense and Cost Containment Expense" or "DCCE" when used with regard to any
variance have the same meaning as those terms have in section
2644.23(c).
(vii) An insurer that asserts that payments to:
(1) an independent contractor; or
(2) an SIU owned by an Affiliated Insurer;
or
(3) an SIU independent of an insurer,
but which is owned directly or indirectly, in whole or part by the insurer applying
for a variance or by an Affiliated Insurer, shall in its variance request, provide
the Department of Insurance with documentation showing the costs of investigation
for the purported "Allocated Costs" claimed in the variance request. The payments
constituting the basis for the variance must be bona fide payments
for investigation of individual cases of suspected insurance fraud. It shall be the
burden of the insurer to demonstrate that the costs are bona fide
costs for investigation of insurance fraud in the State of
California.
(B) An
insurer meeting the qualifications set forth below will be allowed to recover its
expenses for the most recent year for dedicated loss prevention programs such as
brush clearance, driver education, risk management, hazard mitigation or accident
prevention. Loss prevention expenses do not include SIU expenses under subsection
(A).
(i) An insurer may recover its "Allocated
Costs" for its loss prevention expenses only in its approved rate for the line of
insurance affected by the loss prevention expenses.
(ii) The insurer must provide documentation
detailing the loss prevention program, what additional costs are being incurred and
what losses are being prevented.
(iii)
Recoverable loss prevention expenses are those expended for employees whose duties
are loss prevention, software dedicated to loss prevention, and equipment to be used
for loss prevention. Recoverable loss prevention expenses do not include the routine
and customary costs of marketing or employing underwriters or adjusters.
(iv) The only loss prevention expenses recoverable
are for loss prevention programs dedicated to loss prevention in the State of
California or for the portion of the program within California. The burden of
demonstrating the amount of loss prevention costs, and that those costs are expended
for loss prevention in the State of California is on the
insurer.
(2) That
the insurer should be allowed relief from the efficiency standard due to any or all
of the following:
(A) Higher quality of service, as
demonstrated by objective measures of consumer satisfaction; or
(B) Demonstrated superior service to underserved
communities, as defined in section
2646.6; or
(C) Significantly smaller or larger than average
California policy premium, including any applicable fees. These fees include but are
not limited to: policy fees, installment fees, endorsement fees, inspection fees,
cancellation fees, reinstatement fees, late fees, SR-22, and other similar
charges.
(3) That the insurer
should be authorized leverage factor different from the leverage factor determined
pursuant to section
2644.17 on the basis that the insurer
either writes at least 90% of its direct earned premium in one line or writes at
least 90% of its direct earned premium in California and its mix of business
presents investment risks different from the risks that are typical of the line as a
whole. The leverage factor shall be adjusted by multiplying it by 0.85. The surplus
ratio in section
2644.22 shall likewise be divided by
0.85. If an insurer writes at least 90% of its direct earned premium in one line and
writes at least 90% of its direct earned premium in California, the insurer will
only be authorized one leverage factor adjustment of 0.85.
(4) That the insurer should be granted relief from
operation of the efficiency standard for a line of insurance in which the insurer
has never previously written over $1 million in earned premiums annually and in
which the insurer has made or is making a substantial investment in order to enter
the market. Any such request shall be accompanied by a proposed amortization
schedule to distribute the start-up investment.
(5) That the minimum permitted earned premium
should be lowered on the basis of the insurer's certification, and the
Commissioner's finding, that the rate will not cause the insurer's financial
condition to present an undue risk to its solvency and will not otherwise be in
violation of the law.
(6) That the
insurer's financial condition is such that its maximum permitted earned premium
should be increased in order to protect the insurer's solvency. Any application for
authorization under this subsection shall include:
(A) A showing of the insurer's condition, based on
generally accepted standards such as the National Association of Insurance
Commissioners' Insurance Regulatory Information System;
(B) A plan to restore the financial
condition;
(C) A showing that,
consistent with the claimed condition, the insurer has reduced or foregone dividends
to stockholders or policyholders; and
(D) A plan to reduce rates once the insurer's
condition is restored, in order to compensate consumers for excessive
charges.
(7) That the loss
development formula in section
2644.6 does not produce an actuarially
sound result because
(A) There is not enough data
to be credible;
(B) There are not enough
years of data to fully calculate the development to ultimate;
(C) There are changes in the insurer's reserving
or claims closing practices that significantly affect the data; or
(D) There are changes in coverage or other policy
terms that significantly affect the data; or
(E) There are changes in the law that
significantly affect the data; or
(F)
There is a significant increase or decrease in the amount of business written or
significant changes in the mix of business.
(8) That the trend formula in section
2644.7 does not produce the most
actuarially sound result because
(A) There is a
significant increase or decrease in the amount of business written or significant
changes in the mix of business;
(B)
There are not enough years of data to calculate the trend factor;
(C) There is a significant change in the law
affecting the frequency or severity of claims;
(D) It can be shown that a trend calculated over a
period of at least 4 quarters other than a period permitted pursuant to section
2644.7(b) is more
reliable prospectively;
(E) There are
changes in the insurer's claims closing practices that significantly affect the
data; or
(F) There are changes in
coverage or other policy terms that significantly affect the
data.
(9) That the maximum
permitted earned premium would be confiscatory as applied. This is the
constitutionally mandated variance articulated in 20th Century v.
Garamendi (1994) 8 Cal.4th 216 which is an end result test applied to the
enterprise as a whole. Use of this variance requires a hearing pursuant to
2646.4.
(g) If there is more
than one actuarial analysis of a variance, each of which is based on reliable data
and utilizes methods which are shown by qualified expert evidence to be generally
accepted as sound by the actuarial community and the appropriate methods for the
particular variance, then the variance shall be granted, denied or calculated
utilizing the actuarial proposition that results in the soundest actuarial
result.
(h) Notwithstanding any other
section of these regulations, the aggregate total adjustment to the efficiency
standard for all variances combined shall not exceed the difference between the
insurer's most recent year total expense ratio excluding defense and cost
containment expenses and the efficiency standard.
1. New section
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).
2. Amendment 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).
3. Change without regulatory effect amending
subsections (d)(i)-(ii) 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.
