New York Codes, Rules and Regulations
Title 11 - INSURANCE
Chapter V - Rates And Rating Organizations
Subchapter F - Treatment Of Excess Profits In Motor Vehicle Insurance
Part 166 - Treatment Of Excess Profits In Motor Vehicle Insurance
Subpart 166-2 - Discussion Of General Rules
Section 166-2.6 - Disscussion of annual rate formulas

(a) Professor Williams proposed two formulas to measure profitability. He used the simpler formula in establishing reasonable and excess profit levels. The more complex formula would require the measurement of individual-insurer rates of return, although these returns would then be summed over the industry and over the six-year period. The department has adopted the simpler approach for measuring industry profitability.

(b) The simpler formula calculates all-industry, countrywide profitability but substitutes New York automobile results for the countrywide underwriting results of the industry. This approach makes several assumptions: funds attributable to automobile insurance are held the industry average length of time; net worth is attributable to automobile insurance policyholders in proportion to earned premiums; capital gains or losses can and must be included. By using aggregate data, furthermore, average industrywide expenses, premium-to-net worth ratios, investment returns and New York underwriting returns are assumed. These assumptions are reasonable and necessary to minimize distortions in the final results.

(c) Investment income and capital gains are now the major contributors to overall insurer profitability. Section 677(5) (now section 2329) of the Insurance Law permits the use of uniform assumptions when reasonable, and the department concurs with Professor Williams' use of industrywide all-lines investment results in profitability measurement. It is not the intention of the statute to reward or punish individual insurers for their differences in investment strategy, financial structure or good fortune.[FN7] Likewise, industrywide premium-to-surplus ratios and taxes are used. New York's industrywide automobile underwriting results are included in Professor Williams' formula, since individual-insurer results are excessively volatile and would produce rates of return which would not be credible.

(d) The simpler formula is adequate for the task at hand. New York's underwriting results are derived from the New York Insurance Department's Loss and Expense Ratios, which in turn is compiled from individual-insurer annual statement and insurance expense exhibit data. The second major data source for the simpler formula is Best's Aggregates and Averages, from which industrywide all-lines investment results are derived and which is compiled from individual-insurer annual statement data. The department is satisfied that the results they give are reliable.

[FN7] Although some significant differences may be lost through an aggregate approach, the inclusion of capital gains in the formula is most meaningful when a broader data base, incorporating many insurers' results over many years, is used. The statute requires that return on investment from all sources must be included. Therefore, the formula properly includes both realized and unrealized capital gains.