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Actuarial Consulting

How to Get a Commercial Lines Filing Approved in the State of Washington

by Michael Covert

The State of Washington has some of the most thorough actuarial / competitive analysis support requirements for rate filings out of all 51 U.S. jurisdictions. To obtain approval on a commercial lines new program or a rate filing revision, specific steps must be followed, or your chances of approval quickly diminish. Based on decades of actuarial consulting to insurance companies writing business in Washington, we have seen what helps improve the chances of speedy approval – and what gets in the way. Following the below steps will help ensure a more timely approval in this highly regulated state. 

New Program Filings:

Bureau Based Filings

Filing to adopt the loss costs and rules of the Insurance Services Office (“ISO”), for example, is a type of bureau-based filing. While these are the easiest to obtain state approval – since the bureau loss costs are already approved – you are still required to support the loss cost multiplier (“LCM”) and any state exceptions. The LCM consists of commissions, taxes/licenses/fees, other acquisition expense, general expense, and profit load. These must be supported based on your historical expenses (or industry expenses if historical data is not available) and should not deviate from the historical averages without support. For long tailed lines, like commercial auto liability and commercial general liability, you must also include an increased limit factor (“ILF”) risk load offset in the LCM (which tends to lower the overall LCM from the indicated). In addition, deviating from the LCM, which is usually done by incorporating a loss cost modification factor (“LCMF”), requires full support either from competitors approved in the state or historical data. 

Independent Rating Plans

If your rating manual is not based on a rating bureau, you will need full support for the base rates and any rating factors in the proposed rating plan. If your rating plan is not an exact copy of an approved Washington competitor’s rating plan, any deviations will need to be supported with a competitive analysis. A comparison of base rates and all rating variables will be required to ensure they are not inadequate, excessive, or unfairly discriminatory. In addition, expense offsets are required as discussed in more detail below.

Filings Based on Competitors

Our lengthy actuarial consulting experience in Washington has shown us that one of the best ways to get an independent rating plan approved is to base your filing on another approved Washington competitor manual. You must supply the Department with the SERFF# as well as the Washington Department approval # on any competitor analysis. Note that any deviation from that competitor plan must be fully supported using other approved competitors or with applicable historical premium/loss data. 

While Washington technically does not permit filings based on other competitors, they are permissible if you derive the loss costs of your competitors and load in your own underwriting expenses and profit load. A filing will not be approved without using this method to derive the base rates, so it is likely that your Washington rating manual will deviate from the manual you are using in other states. It is also very possible that the competitor manual upon which you want to base your rates is not approved in Washington, meaning you may need to select a different, Washington-approved competitor.

Return on Equity Exhibits

These are required in your filing submission to support the underwriting expenses and profit load, but unlike most other states, Washington is only interested in your return on insurance operations, not your total return on equity. The return on insurance operations, in general, cannot be above 5.0%. Many times, profit load, or other figures in the exhibits, require adjustments to pass this requirement. While there are other alternative methodologies the Department permits, making adjustments to a return on equity model is usually the best way to meet this requirement. For Bureau based filings, it is also likely that your LCM will be different in Washington compared to other states.

Filing Memo

Explaining the derivation of your rates in detail is important to obtain approval. You should explain the exact steps taken to develop the rating manual, providing your step-by-step process to derive the rates and rating factors. Further, each insurer must include the name of its statistical agent, per statute requirements. It is possible to not receive any objections from Washington and get a timely approval if all the above guidelines are carefully followed.

Rate Filing Revisions:

Actuarial Support

If you are making a rate revision to a currently approved program, any changes need to be fully supported. If you are taking a base rate increase, in general, an overall rate level indication is required. A rate indication indicates the estimated rate change necessary on an aggregate basis. If you are making any changes to your rating variables, a class plan analysis is required. A class plan analysis will review some or all the rating variables in your rating manual, based on data availability, excluding the base rate. If you are looking to make a rate revision based on competitor rates rather than actuarial data, a detailed competitor analysis is required, showing how the base rate or rating factor deviations are justified. 

Actuarial Memo

While a filing memorandum is necessary for a new program filing, an actuarial memo is required for a rate filing revision when historical data is used to support your filing. Your rate level impact should be in line with the rate level indication (i.e. an increase / decrease should not be above / below the indication). If you are making changes to rating variables, it is important that your class plan analysis supports each change accordingly. Always give as much detail as possible supporting why you selected a particular change to a rate or rating factor to prevent unnecessary questions.

Do you need guidance on how to get your Washington new program or filing revision approved to improve speed to market? Contact the actuarial consulting experts at Perr&Knight today. 

Navigating Michigan’s PIP Auto Insurance Changes 

by Mitchell Paden

Michigan’s recent overhaul of Personal Injury Protection (PIP) policies has created a labyrinth for insurance companies writing personal auto business in the state. A quick re-cap: until July 2, 2020, insurance companies were required to offer unlimited benefits for no-fault claims within the state. In 2020, Michigan passed sweeping legislative reform which made numerous changes including a ban on certain factors from being used to set rates, such as occupation, credit score, and homeownership. The most significant change, however, was enabling insurers to offer lower limits to provide premium relief for drivers who accept lower coverage limits.

These changes have thrown a wrench into rules and filing requirements for auto insurers in the state. Here are a few key points to be aware of if your company is currently writing business in Michigan or if you plan to expand into the state, as outlined by our actuarial consulting experts.

File-and-Use Is Now Prior-Approval

Auto insurers in Michigan, previously accustomed to using new rates immediately after filing changes with regulators via its “file and use” rules, are now required to submit rates to the Department of Insurance and Financial Services (DIFS) and obtain approval before they go into effect.

Many insurers – especially smaller companies – struggle to provide regulators with the appropriate actuarial support documentation for their rate and forms filings in this new prior-approval environment. The previous approach of “If this doesn’t work, we can just submit another filing” no longer applies.

Once accustomed to filing and putting new rates into effect immediately, companies must now maintain a longer runway for any proposed changes. In addition to the extra time it takes to gather the requisite materials and documentation for the new requirements, companies should build at least 90 days into their planning process for DIFS’ review of the filing before approval. For companies that aren’t proactive, this change can result in significant delays for new rates to become effective, which can disrupt company earnings and cash flow.

PIP Limit Percentage Requirements

The regulation requires that companies maintain compliance with required premium discounts for the new, lower PIP limits. Every filing now requires a detailed accompanying worksheet that outlines average premiums at each offered limit to help ensure that the new limits still provide the required premium reductions to customers. This worksheet must be filled out with new data for each rate filing, and many companies lack the in-house actuarial support staff to compile the information promptly. The PIP limit worksheet is the largest of numerous new requirements on all rate filings in the state. Actuarial consulting from outside experts like the accredited actuaries at Perr&Knight can alleviate the pressure on in-house teams as they become more accustomed to new filing policies.

A Changing Environment

Changes to PIP coverage and rating rules for Michigan drivers are a reminder that insurance is never stagnant. Climate change, global pandemics, shifts in driving behavior, and more all contribute to a constantly evolving landscape.

Though changes may seem slow, insurance companies that lack inherent flexibility in their business processes will struggle to comply with new legislation and regulatory environments – and risk being outpaced by more nimble competitors.

Eventually, these new factors will become standard for Michigan insurers, but until then, there are bound to be a few bumps in the road ahead. Working with the experts at Perr&Knight can help smooth the path. Our actuaries and filing teams have longstanding experience supporting clients in Michigan. We understand the depth and details of these new PIP regulations and can help insurers stay on track for approvals.

Contact Perr&Knight today to learn more about our actuarial consulting services.

How to Navigate the California Rate Filing Environment

by Brett Horoff

Many insurers are struggling to obtain additional rate in California to address unprofitable programs and elevated loss trends. State Farm’s recent announcement in May 2023 that they will stop accepting new business for homeowners shines a spotlight on the issues with the California marketplace. While State Farm made a public announcement, Allstate quietly notified the state of their decision to stop writing new homeowners business (including condo) and commercial policies within the last year. AIG also decided in early 2022 to exit from the admitted homeowners market in California.

How long does it take for filings to be approved?

In Chart 1 below, we have displayed the time to approval for all filing types for the period January 2012 through May 2023. Figures worth noting:

  1. Rate/New Program Filings: Increased from 80-90 days in 2012 to around 350 days in 2023
  2. Other Filings (e.g., rule and form filings): Increased from about 65 days to approximately 150 days
Source: Compiled from filings available from S&P Market Intelligence

We further break down rate filings by line of business in Chart 2 below. Although there are some variations by line of business and fluctuations by year, all the lines of business are on a similar trend path: filings taking longer to be approved.

Source: Compiled from filings available from S&P Market Intelligence 

Based on information provided by our actuarial consulting and state filings experts, there are several factors that have contributed to the increase in the time to approval.

Homeowners rate filings
 Starting in 2018, there has been a noticeable increase in the time to approval for homeowners. In response to a series of devastating wildfires, insurance carriers filed for more restrictive underwriting criteria and significant rate increases in wildfire areas. The CDI heavily scrutinized these filings to ensure the availability of insurance and to make sure that rates were not excessive for these risks. The CDI also added a layer of review that required signoff by upper management, including the commissioner, further increasing the time to approval.

Personal auto rate filings
 The CDI implemented a moratorium on personal auto rate increases during COVID-19. When the moratorium was lifted, the CDI started reviewing rate filings that had been on hold and pending – in some cases for more than a couple of years. At the same time, other insurers started submitting much-needed rate increase filings. Additionally, the CDI was concerned that insurers did not refund enough premium during COVID-19 and formed a committee to review the refunds. The committee coordinated the refund reviews with the rate filings being submitted by insurers, and this extended the review time for personal auto rate filings.

Changes to the filing review process
 Over the years, the CDI has changed its review process. For example, nowadays, you need to submit a complete rate manual with each rate and/or rule filing, and the CDI typically reviews the entire rate manual – not just the items being revised. Largely due to the CDI changing its position over time, it is not unusual to receive objections on items that are not being altered in the filing and were previously approved.

Staffing shortages
 Another factor impacting the time to approval is staffing shortages at the CDI. The CDI has had a number of experienced Bureau Chiefs and analyst retire over the last few years. With the CDI working remotely, it has also made training of new staff more difficult.

All of the above has led to an increase in the number of pending rate filings over the last several years. Fast forward to today, and the number of pending filings is almost 70% higher than the average of the five years pre-COVID. At the same time, the number of submitted rate filings per year from January 2021 to May 2023 is down between 20% to 30%.

Summary of pending and approved rate filings for homeowners and personal auto

There is a significant need for rate increases in California, as can be seen by the pending rate filings for homeowners and personal auto, which are displayed below for the top 10 carriers.

Below are some key figures on approved filings for homeowners and personal auto as of May 2023:
• 16 homeowners and 40 personal auto rate increases filings have been approved in 2023
• Two homeowners and six personal auto rate filings submitted in 2023 were approved
• Approved rate increases range from 3.5% to 65.0% for homeowners and 4.5% to 65.0% for personal auto

As can be seen from the above, there are rate filings that are being approved a lot faster than the overall average to time approval. Also, there is a wide range in the proposed rate changes that are being approved.

How can an insurer reduce the time to approval for filings?

According to our actuarial consultants and state filings experts, the key to reducing the time to approval for filings is to minimize the rounds of objections. To do this, an insurer should do the following:

  1. Expert rate filings reviews: Whether it is an internal review, or one done by an outside actuarial consulting firm, having an expert on California filings review your filings will reduce the number of objections.
  2. Perform data quality and reconciliation: The CDI has a data quality and reconciliation checklist, and companies should confirm that all items on the list reconcile. The checklist is not a required part of the filing, but it includes all the data checks performed by the CDI.
  3. Review updates to filing instructions: The CDI updates its filing instructions on a periodic basis, so insurers should monitor this for any new requirements or changes. For example, the CDI added a rating example requirement earlier this year, which the CDI will request in an objection letter if not provided.
  4. Have virtual meetings with the CDI: Virtual meetings are a good way to keep a filing moving and reduce correspondence back and forth. If you are unsure whether a response will satisfy the CDI, schedule a virtual meeting with the CDI, go through the response and get the CDI’s feedback. Pre-filing meetings or emails can also be used to answer questions on how items should be filed.
  5. File rate changes higher than 6.9%, if well supported: For many years, insurers filed successive 6.9% rate increases rather than requesting their full rate need in a single filing. Although consumer groups can force a rate hearing on personal lines with a rate increase above 6.9% (14.9% on commercial lines), the insurer can negotiate with the consumer group and the CDI on well-supported filings.

About Perr&Knight

Perr&Knight is a leading provider of actuarial consulting and state filing services to insurers in California. Our experts actively follow the California market and are deeply familiar with all the filing requirements in the state. We prepare and submit more California filings than any other company. Our experience includes expert testimony on rating filings and providing guidance to industry associations.

Please contact our team of actuarial consultants and state filing experts to assist with your California insurance products.

Best Practices when Performing Profitability & Competitive Analyses on Program Business

by Michael Covert

In our prior blog on Program Business, called “Guidelines for Filing Program Business,” we discussed how insurance carriers have become more and more interested in writing “program” business over the years. In this new blog, we provide guidance on how program administrators can maintain profitability and competitiveness of their programs. As a recap, we will reiterate the definition of program business.

WHAT IS PROGRAM BUSINESS?

According to the Target Markets Program Administrators Association, Program Business is defined as insurance products targeted to a niche market or class, generally representing a book of similar risks placed with one carrier. The administration of the program is done through Program Specialists, often referred to as Program Administrators or managing general agents (“MGAs”), who have developed expertise in that market or class.

Although administrative responsibilities are negotiated between the Program Specialist and Carrier, the responsibilities of the Program Specialist include underwriting selection, binding, issuing, billing, and often marketing, premium collections, data gathering, and claims management / loss control.

PROFITABILITY ANALYSES

Maintaining profitability can be difficult without a thorough understanding of the actuarial figures insurance carriers and reinsurers generally look at when reviewing Program Business. We discuss below a few types of standard actuarial analyses that are very beneficial to supporting a discussion around profitability.

Overall Rate Level Indications

A rate indication estimates the rate change necessary on an aggregate basis to balance the fundamental insurance equation, i.e., Premium = Losses + Loss Adjustment Expenses + Underwriting Expenses + Underwriting Profit, in the prospective / future period.

For admitted and non-admitted programs, this indication will provide actuarial support for any desired base rate changes, whether positive or negative, and indicates the change needed to meet the program administrator’s desired profit provision.

For example, if your projected loss ratio is 55.0%, this would be compared to the target (or permissible) loss ratio of say 65.0%. The division of these two results in a factor of 0.846 (rounded to three decimal places). By taking 0.846 minus 1.000 you get an overall indication of -15.4%. This implies rates could be decreased by 15.4% while still achieving the desired profit provision.

Historical and Projected Loss Ratio Analysis

While very similar to the Overall Rate Level Indications, these have more of a focus on the historical ultimate loss and defense and cost containment expense (“DCCE”) ratio and the projection of that ultimate loss and DCCE to the prospective / future policy period as compared to determining the amount rates many need to increase or decrease.

The historical ultimates are used to produce loss ratios from more of a financial standpoint and how the program has performed up to the evaluation date of the analysis (for example, an analysis with data as of December 31, 20XX.) The projected ultimate loss and DCCE ratio (i.e. also called “the loss pick” by many program administrators) gives the program administrator an expectation of how the program might perform, from a loss ratio standpoint, over the next policy year all else being equal.

Rating Factor / Class Plan Analyses

A rating factor or class plan analysis will review all rating variables in a rating manual. Rating factors, for example, might include territory (or zip code), limit of insurance, deductible, class code, age of building, credit score, etc.

There are two main types of class plan analyses: one-way analyses and multi-variate analyses. One-way analyses review each rating variable on a standalone basis while not considering any correlation with other rating variables. Multi-variate analyses, which typically involve modeling, such as generalized linear modeling, or other techniques, help to remove correlation between rating variables. Multi-variate analyses typically require much more data, time, and effort.

Program managers will want to determine which analysis makes the most sense for their specific book of business. These types of analysis are very helpful in determining which rating factors are profitable and unprofitable and what changes should be implemented to maintain or improve profitability.

COMPETITIVE ANALYSES

In conjunction with profitability analysis, reviewing the rates, rating plans, forms and endorsements of your competitors are key to help maintaining profitability. It is important that a rating plan achieves an appropriate rate for the risk.

If your competitors have more advanced rating plans or different rating variables that achieve a better rate for the risk, you will likely be adversely selected against and lose your profitable business to a plan with lower rates for these good risks. Conversely, the unprofitable business will stay with you since you are unable to charge them the higher rates needed to achieve profitability.

Finally, there are many differences in policy forms and endorsements that could cause you to pay claims your competitors would otherwise exclude and enhancement endorsements making your competitor’s program more attractive.

The majority of competitor information used in these comparisons comes from publicly available filings or company / industry financial information. We discuss three types of competitor analyses below.

Competitive Analyses – Rates: Along with the above-noted actuarial analyses, it is beneficial to analyze your competitive position at the same time to help ensure any changes made based on your data do not adversely impact your competitive position.

Premium comparisons compare your policy premium, for a specific number of rating examples, to that of your main competitors. Rating factor / class plan comparisons are similar to premium comparisons, except they compare all the underlying factors by rating variable in your rating manual to your competitor’s rating factors. While performing this review, you can also determine if your competitors are offering different or more competitive coverages and/or different rating variables not currently a part of your rating plan, that achieve a better rate for the risk, and might be worth implementing.

Competitive Analyses – Forms:  In conjunction with the premium and rating variables analysis above, it is important to review your policy form and endorsements to help ensure you are offering (and excluding) similar coverages.

If not, you may want to make changes – or at least acknowledge the differences are intentional – and ensure that the rates appropriately reflect the differences. When reviewing endorsements, the entire forms library is usually compiled to see if any key exclusionary or broadening endorsements are missing that might assist in profitability as well as competitiveness.

In addition, if it has been quite some time since a state-by-state compliance review has been performed, our product design team could uncover non-compliant forms or endorsements.  Making appropriate adjustments ahead of time will prevent painful market conduct exams in the future.

Market Research – It is also good to monitor new programs or filing revisions your competitors are implementing. If you are aware of when your competitors are increasing rates, adding new rating variables, changing coverages, adding new forms etc., you can make changes accordingly to maintain your competitive position.

Do you need guidance from a profitability or competitive standpoint on your program or a specific book of business? The actuarial consulting, product design and state filings experts at Perr&Knight are here to help. Contact us today.

Five Benefits of an Expert Review of Your Rate/Form Filings

by Brett Horoff

Have you had a filing disapproved in Florida or New York?

Are you receiving multiple objection letters on your California filing identifying items that do not comply with state requirements?

Do you struggle with providing the required actuarial support in Washington?

You are not alone.

It is incredibly difficult for companies to keep up with each state’s requirements. Most companies do not submit enough filings or have the consistent communication with the Departments of Insurance (“DOI”s) to gain the expertise needed to handle certain states without consulting an expert.

If you work for a large insurance company, you may have a pre-filing meeting with the DOI to discuss your filing. This allows you to obtain some feedback on potential concerns that the DOI may have on the proposed rates and forms, but this is not a comprehensive review, and you may often run into DOI objections during the filing review process that could have been avoided with additional insight on the state’s requirements. Adding an expert review of filings prepared by your company is a “must have” to achieve timely approvals in key states.

Below we provide greater details on the benefits achieved through an expert review of your filings by an actuarial and insurance consulting firm with extensive state filings experience.

Benefit #1: Increase the likelihood of proposed rates and forms being approved

It is not unusual for companies to receive filing objections from state DOIs that request changes to the company’s proposed rates and forms. If a company does not have a full understanding of the options that will satisfy the DOI’s concerns, it may make undesired revisions to the product in response to an objection.

Our actuarial consultants worked recently on a management liability filing in California that used range for rates and rating factor. The DOI had concerns about the subjectivity of the ranges, which may lead a company to eliminate the ranges and use specific rates/factors. Our actuarial consultants were able to assist the company in providing a solution that kept the ranges and was acceptable to the California DOI.

Whether it is to ensure a company obtains its proposed rate change or to recommend changes to the company’s rating plan to achieve the company’s goals, a review by an actuarial consultant and an insurance product development expert can have a positive impact on a company’s bottom line.

Benefit #2: Ensure filing complies with DOI requirements

While each state has laws, often there are DOI positions and interpretations, which are not published, and companies learn about them after the filing and during the DOI’s review. Not knowing this type of information could negatively impact a company’s filing. For example, New York disapproves filings without the opportunity for the company to respond when filings are substantially out of compliance with state requirements. During 2021, the New York Department of Financial Services disapproved 19% of submitted filings and another 8% of filings were withdrawn. New York is not the only state that takes this approach.

The Florida Office of Insurance Regulation is often known for disapproving commercial lines form filings that are not compliant with the state requirements. For auto policies (both personal and commercial), New York has unique coverage requirements that must be reflected on the declarations page. Even if a company uses a bureau template, a state-specific version is generally needed to avoid a series of objections pertaining to the format and contents of the declarations page.

Having an expert review from an actuarial and insurance consulting firm with regulatory compliance services can help companies avoid the dreaded disapproval letter.

Benefit #3: Identify potential DOI objections

While obtaining filing approvals without any DOI objections is unlikely in some states, the ability to identify potential objections will allow companies to address concerns prior to submitting the filing. Not only does this reduce the number of objections received during the state filing review process, but it also provides companies the opportunity to address items that may lack the appropriate support or may raise additional questions from the DOI.

By having an expert review, the company can identify potential objections and either address them upfront or be prepared for them. Many companies are surprised when they receive objections on California filings questioning items that were previously approved in a prior filing and are not being revised in the current filing. For rate and rule filings, the California DOI requires a complete manual with each filing and will review the entire manual – not just the proposed changes.

Benefit #4: Improve relationship with the DOIs

Although DOIs will review each filing independently, the DOIs will remember companies that consistently submit filings not in compliance or lack appropriate support. For frequent violators, the DOIs may outright disapprove the filing without sending an objection letter. The DOIs share information within its various operational areas as well as with other DOIs. This information can often lead to a market conduct inquiry, especially if the concern is related to noncompliance or may have an impact on the consumer. When a company submits a complete and compliant filing, the return on investment may lead to a quicker review by the DOI.

With many of the DOIs experiencing staffing shortages, any assistance companies provide to reduce the time that the DOIs spend on reviewing filings will be appreciated by the state.

Benefit #5: Reduce the time to approval

When companies are submitting rate filings, the premium impact of the changes could be in the millions, so reducing the time to approval could have a significant impact on the company’s bottom line. In 2022, the average time to approval for California on a rate filing is 337 days (median: 264 days) and a new program filing is 207 days (median: 209 days).

When companies have their filings reviewed by actuarial consultants and state filings experts, it allows submission of a more compliant filing with the proper supporting information and may result in the filing being approved quicker.  Another benefit of engaging these experts is that they could help companies navigate filings through the DOI in the most efficient manner possible.

Need an expert review of your filings?

Perr&Knight is a leading provider of actuarial, product design and state filing services to insurers. Our actuarial consultants, product design consultants and state filings experts are very familiar with all the filing requirements in each state – especially the states where insurers struggle the most.

Please contact us if you need an expert filing review.

P&C Carriers: A Strategy for Entering the A&H Market

by Susan Cornett

By Susan Cornett, FMLI, AIRC, CFE and James Vallee, FSA, MAAA

P&C insurance carriers recognize the opportunity to expand product lines and increase revenue by expanding into Accident & Health products. However, the differences between P&C and A&H product development are significant and what applies to P&C may not apply to A&H from a regulatory standpoint. Understanding those differences will allow P&C carriers to enter the A&H market with faster speed-to-market along with high-quality products.

During decades of providing insurance product development and actuarial support for insurance companies across the US, Perr&Knight has zeroed in on a low-risk A&H entry product for P&C: blanket accident policies.

Why develop a blanket accident policy?

Commercial entities, schools, universities, and other organizations often need supplemental blanket A&H policies to fill gaps in medical coverage to further support their staff or students. With fewer mandated benefits, these policies are the perfect starting place for P&C companies looking to break into the A&H market and provide additional coverage options to existing clients. Blanket Accident policies also fit nicely with General Liability policies and allow brokers/agents to offer comprehensive insurance protection from a single carrier.

Differences between P&C and A&H product development

Established P&C carriers may think they have the requisite experience to develop A&H coverages. However, a few significant differences between these two types of insurance product development are worth noting.

  • Rate support: Rate support requirements in A&H are different than P&C, usually requiring an actuarial memorandum describing the benefit in the rate structure as well as a signed certification attesting that the rates are reasonable in relation to benefits.
  • Forms and rates standards: On the P&C side, rates tend to receive more scrutiny. On the A&H side, regulators examine policy forms more closely. Though some states are outliers, we find this is a reliable trend.
  • Bureau forms: Many P&C carriers adopt ISO or other bureau forms as part of their P&C portfolio. For most lines, A&H doesn’t have this option. Most insurers rely upon proprietary forms.
  • Statistical reporting: Data reporting is important on the P&C side. But except for a few lines of business, statistical reporting requirements aren’t widespread on the A&H side. Besides ad hoc data calls, most supplemental A&H coverages don’t require such detailed stat reporting.
  • Rate certifications: Although a few states require certification of the rates or rate filings on the P&C side, some states require carriers to attest to their ability to meet target loss ratios for A&H lines.
  • Variable benefits: A&H policies typically rely on the use of variable language to allow inclusion or exclusion of benefits, terms and conditions. It’s not unusual for a blanket A&H policy to be 50+ pages because the benefits are included in the policy and not attached as optional endorsements. From an implementation perspective, this means programming one form with many options instead of 75 forms with no options — another way these policies diverge from P&C.
  • Verbiage differences: Terms and definitions vary between A&H and P&C. For example, P&C uses the phrase “loss costs” while A&H calls these “claim costs”. Unfamiliarity with terms could lead to filing errors.

Commonly asked questions

P&C carriers eager to enter A&H should know a few basic things before moving forward. Here are the most commonly asked questions from P&C insurers.

“Does our license cover A&H?” Short answer, maybe. P&C carriers may already have the ability to write A&H lines of business depending on what is included in their Certificate of Authority. Licensing requirements vary by state. Our licensing experts can help determine whether anything additional is needed. There are important differences in insurance product development and approvals, even for supplemental health policies, so P&C carriers should proceed with caution even if currently licensed to write the business.

“Can we offer blanket A&H on a non-admitted basis?” Simply, no. In the world of A&H, the concept of surplus lines is virtually non-existent. Companies may develop an A&H program thinking it will be available under surplus coverage guidelines, but state export lists rarely include any A&H coverage. The consequences for non-compliance can be steep and may jeopardize a company’s good reputation with state regulators.

“Can we ‘me too’ our A&H policy development?” Unlike P&C, “me too”-ing rating information from competitors’ existing programs is generally not acceptable. Different requirements for rate filing and support are a prime example of a P&C process that has no transferable correlation to A&H.

Start with blanket accident, then expand

After developing a blanket accident policy, companies can easily expand into other supplemental health lines. After getting your feet wet with blanket accident, product lines such as hospital indemnity, critical illness, disability income insurance, and gap medical generally follow the same product development process.

Work with experts

Developing a blanket accident policy may seem straightforward on the surface, but there are lots of opportunities to fall into little-known traps. Partnering with experienced insurance product development partners like Perr&Knight can save P&C carriers from wasting time and money on mistakes.

With our deep experience providing insurance product development and actuarial support services for carriers across both P&C and A&H lines, our professionals act as the “decoder ring” between the two. Working with knowledgeable professionals helps insurance companies step into a new world with greater confidence and ease.

Ready to test the A&H waters with a blanket accident policy? Contact Perr&Knight for help.

How to Navigate California Personal Auto Rate Increases

by Dee Dee Mays

Personal auto writers in California have been abuzz with news of the recent rate increase approved for Allstate Northbrook Indemnity Company. This is the first rate increase approved by the California Department of Insurance (“CDI”) on any type of personal auto program since April 2020. There are many filings still pending. Here are insights on common questions our insurance filings support team hears from insurers:

How did Allstate get their filing approved so quickly?

That is the $165 million dollar question. The Allstate filing was submitted on June 30, 2022, well after many other filings that remain pending. Consumer Watchdog sent a letter to Commissioner Lara urging him to reject the filing, but does not appear to have submitted a formal petition to intervene. In October 2021, the Commissioner mentioned Allstate as one of three companies that needed to provide additional COVID-19 refunds to their policyholders. At this time, there is no publicly available information indicating that Allstate has issued any additional refunds subsequent to Commissioner Lara’s letter.

Allstate provided the following information on refunds to date in their approved filing:

In the final correspondence on the approved filing, that was submitted on the day before the filing was approved, Allstate confirmed that the next rate filing for their program in California would include the removal of their remaining affinity group rating program. This affinity group is for Specialized Professionals. Allstate’s approved manual includes a 4% discount for policies where the “named insured/applicant or spouse is a degreed professional in one of the following occupational groups: Education or Library Science, Science, Engineering, or Information Technology.” This “two-tiered system” was one of the concerns mentioned in the Consumer Watchdog letter.

Is it true that an increase greater than 6.9% requires a public hearing?

No. This is a common misconception. In fact, any filing can result in a public hearing, if a consumer group petitions to intervene and the Commissioner grants their request for a hearing. California Insurance Code 1861.05(c) includes the following [if] “the proposed rate adjustment exceeds 7% of the then applicable rate for personal lines or 15% for commercial lines … the commissioner must hold a hearing upon a timely request. “ In practice, consumer groups petition to intervene on filings with changes lower than 7% as well as higher.

There are currently 51 rate increase filings pending with the CDI. Of those, 5 have proposed increases of more than 7%.The oldest pending filing was submitted in October 2019.

If I have a rate change pending, can I revise it to propose a higher rate change?

Yes. This is similar to submitting a new filing and will result in the new change being added to a future public notice list, usually within two to three weeks after the change is submitted. The filing cannot be approved any earlier than the 46th day after public notice, which gives a consumer time to petition to intervene on the filing. Progressive initially submitted their filing for a 6.9% rate increase on January 7, 2022. This change appeared on the January 21, 2022 public notice list. Progressive amended their filing on September 30, 2022 to propose a 19.3% increase.   his change appeared on the October 14, 2022 public notice list. After no correspondence from the CDI since Progressive submitted the letter to waive the deemer date on March 9, 2022, the CDI issued an objection letter on November 3, 2022 with an November 18, 2022 due date.

What usually happens if a consumer chooses to intervene on a filing?

Hearings are fairly rare, even after a consumer group petitions to intervene. Typically, the CDI will allow the consumer group to be involved in the filing review process and provide their feedback on the filed change. The CDI will hold one or more meetings with the insurance company and the consumer group to discuss the support for the changes and encourage the insurance company and the consumer group to come to agreement on a change and avoid the hearing process. The consumer group will then submit their invoice for their costs that, if approved by the CDI, are paid by the insurance company.  The amount of compensation paid to intervenors from 2003 to 2020 is available at http://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm.

This shows the following amounts paid in 2020:

What happened with the Wawanesa personal auto rate increase filing?

As we mentioned in an earlier blog post on the moratorium, Wawanesa Insurance Company chose to reactivate the deemer on their filing, thus triggering a hearing. Our insurance filings support experts have recently learned from a representative of the CDI that “The Hearing for this matter was taken off calendar and a stipulated settlement agreement is being reviewed.”

What should my company do if we need a rate increase in California?

We have provided some additional ideas in our earlier blog. For example, consider accompanying class plan and rule revisions to improve segmentation and underwriting and to alleviate common concerns from the CDI. Regardless of how you proceed, having an insurance filings support expert with years of experience preparing personal auto rate filings in California could improve the time to approval and potentially save a company a substantial amount of money. Whether it is preparing the actual rate filing or performing a review of a rate filing prepared by the company, an expert can provide guidance that will increase the chance of having the most successful filing. There are many hot-button topics that may come up during a review of the filing.  An expert can make you aware of these to reduce the potential for surprises.

Perr&Knight is a leading provider of actuarial and state filing services to insurers in California. Our actuarial consulting team actively follows the California market and is very familiar with all the filing requirements in the state. We prepare and submit more California filings than any other company. Our actuarial consulting experience includes expert testimony on rate filings and providing guidance to industry associations.

Please contact us for any insurance filings support that is needed with your California insurance products.

Why Businesses Today Are Turning to Captive Insurance

by Charlie Lenz

States throughout the US are seeing the number of captive formations skyrocket compared to the past. The 2021 year showed significant increases in the world’s largest captive domiciles. The number of Vermont-licensed captives grew by 31 in 2021, the largest net gain (new captives less dissolved captives) in the domicile’s long history.  The table below shows the  10 domiciles with the largest gains over the 2021 year.

Two key trends in the current hard-market cycle are driving up the number of captive formations: (1) demand for cyber insurance; and (2) climate changes that have steadily driven up property premiums.

As times change, more businesses recognize the value of captive ownership. If your company has never considered self-insurance through captive insurance, now may be the time.

Cyber insurance has become a must-have protection for today’s businesses

Cyber insurance continues to be a hot topic in the industry. As malicious actors become more organized and their attacks more sophisticated, companies without cyber insurance are at risk for potentially devastating ransomware ambushes. Large companies and government entities have been bolstering their cybersecurity protections and can afford to pay cybersecurity analysts, an increasingly scarce resource, making it more challenging for hackers to hijack their data. As a result, bad actors are turning to easier targets: schools and universities, small- and medium-sized businesses, municipalities, and other organizations less equipped to mount a strong defense.

Organizations that previously felt they weren’t significant enough to warrant hacker attention are now prime targets.

As cyber premiums rise, more companies are self-insuring

Cyber insurance premiums nearly doubled industrywide in 2021, and the increases have continued through the first quarter of 2022. Organizations waking up to the need for cyber insurance are facing a catch-22 – they know they need it—but it’s costly.

Companies are forming captives or adding captive insurance to their plans to manage the high cost of cyber insurance premiums. But businesses that have never licensed a captive are often unsure where to begin. Speaking to the experienced actuaries at Perr&Knight is a great start. We’re available to answer questions and provide support through the process of obtaining a captive license.

Lack of historical data for cyber insurance

For companies that already have a captive in place and want to add cyber insurance, our actuarial consulting teams can help with this.

When adding coverage to a captive, companies must provide a business plan amendment to captive regulators, including estimated captive premiums. However, because cyber insurance is so new, the availability of historical data creates challenges determining premiums for this coverage.

Again, this is where working with experienced partners like Perr&Knight is advantageous. We have developed proven methods for estimating captive premiums based on decades of actuarial consulting expertise.

High property premiums lead to more captive formations

Property insurance is getting hit from multiple angles.  Climate change is increasing the number of weather-related property claims. Tornadoes, floods, wildfires, and other significant weather incidents are happening with greater frequency and intensity—and in never-before-seen areas. These catastrophic events continue to drive the hard market, resulting in insurance affordability and availability issues for many companies.

Additionally, regions throughout the nation are experiencing a runup in insured property values. If a business hasn’t had an appraisal in a decade, they may suddenly find themselves paying substantially higher premium based on their property’s amended value.

Captive insurance can mitigate the affordability problem, which is why more businesses opt to self-insure with a captive.

A pre-feasibility study provides direction

Conducting a pre-feasibility study with an experienced actuarial consulting partner can help determine whether captive formation makes sense for your organization.

At Perr&Knight, we have developed methodologies to produce accurate pre-feasibility studies that provide insight into whether captive ownership makes sense for your business. A pre-feasibility study is not only a cost-effective means of gathering business intelligence; information contained in the study can serve as the basis for the actuarial feasibility study that captive regulators will require.

As times change, captives are here to stay

As the world shifts around us, companies recognize the potential benefits of captive insurance. If your company is considering captive ownership or is already well down the path of forming a captive, the team at Perr&Knight can answer questions, provide direction, and deliver insight into the best course of action.

Contact the actuarial experts at Perr&Knight to conduct a pre-feasibility study or to discuss captive insurance options for your business.

Are Your Personal Auto Rates Keeping Up with Soaring Claim Costs?

by Andrew Douglas

In the personal auto insurance industry, the cost of repairing or replacing cars involved in accidents has spiked and continues to rise. These increases appear in insurer claim severity data as double-digit percentage increases in the cost of covering property damage and collision claims. Propelled by persistent supply chain shortages, general inflation, and shifting composition of vehicles under coverage, some of these higher costs may be here to stay.

Insurers should be responsive to these changes or risk inadequate rates to cover future costs. As actuarial consulting partners to some of the nation’s top insurance companies, we have helped many insurers accurately predict future premiums needed to keep up with these rising costs.

Here are some factors influencing higher costs and what to expect in the coming year.

Claim costs have risen dramatically

Property damage coverage and collision coverage costs are tied to the price of vehicles and vehicle parts. The cost of vehicle repairs and replacements has sharply increased, coinciding with pressures on the global supply chain caused by COVID-19, changing consumer demand, and inflationary impacts.

Countrywide data shown in the table below reveals the average cost of a claim for property damage and collision coverages has increased by over 30%. Many areas of the country have experienced more significant spikes. For example, Florida, Georgia, Maryland, and New York all have experienced claim cost increases closer to 40%.

Source: Chart created using data from the Insurance  Services Office, Inc.  Fourth Quarter 2021 Private Passenger Automobile Fast Track Data Circular AS-PA-2022-013 published on May 12, 2022. Includes copyrighted material of Insurance Services Office, Inc., with its permission.

Safety features drive up costs

New safety-related vehicle features are also raising the price tag for repairs as late-model vehicles feature more crash avoidance technology than ever. True, some of these technologies reduce accident frequency. However, expensive new technologies also elevate repair costs as many of the parts used in these systems are located on the vehicle’s exterior.

For example, the Insurance Institute for Highway Safety (IIHS) April 2019 report showed the average payment per claim for damage to the insured vehicle goes up by $109 for vehicles equipped with the forward collision warning without autobrake.

As the auto industry promotes tech-powered safety features as a selling point, increased associated repair costs are a trend we don’t expect to reverse. According to the IIHS, the percentage of registered vehicles estimated to utilize these systems will increase by over 20 percentage points by 2024.

Shift toward electric vehicles also has an impact

Car buyers’ affinity toward electric vehicles (EVs) will also push severity up. Overall, the number of electric cars on the road in the United States is small, but in some areas like California, EVs make up a significant proportion of new vehicles. In the near term, severity will rise with the expansion of EVs on the road because it takes time to build a robust parts network and shops will need to invest in training to service these new vehicle types.

Additionally, global semiconductor shortages continue to squeeze the supply of microchips in cars, which means low supply and high prices. The dynamics causing parts shortages are likely to persist into 2024 (S&P Global, 2022).

As gas prices rise and the popularity of electric vehicles continues to climb, claims costs may trend upward as well.

Insurers nationwide are scrambling to increase rates

Though most insurers reduced rates and/or returned premiums during the height of the pandemic, insurance companies today are feeling the pressure of rising claim costs, resulting in a mass push to increase rates. Due to this realization, rate increase requests are pouring into Departments of Insurance across the country as shown in the graph below. States like California are experiencing long wait times for rate increases to be approved.

Source: Chart created using data from S&P Global Market Intelligence

The type of support required for personal auto rate filings varies by state. With staffing shortages slowing down the filing review process at Departments of Insurance and inflation putting pressure on the rates charged by insurance companies, it is more important that the submitted filing meets all the state-specific requirements. Improving the time to approval could save a company millions of dollars. Partnering with actuarial consulting experts like Perr&Knight for support can reduce the risk of inaccuracies that can slow the approvals process.

Higher costs are here to stay

Supply chain shortages and inflation, new safety technologies, and EV popularity are driving claims costs up and show no sign of abating any time soon. To keep pace with higher expected loss costs, insurers should proactively keep pace with rate increases. Actuarial consulting partners like the team at Perr&Knight can evaluate rates and rating structures to ensure rate adequacy and determine what actions are needed to promote both short and long-term success.

Contact Perr&Knight today to let our actuarial consulting and state filings experts help you ensure the accuracy of your personal auto rates.

Guidelines for Filing Program Business

by Michael Covert

Insurance carriers have become more and more interested in writing “program” business over the recent years. In addition, many carriers only have a single carrier to work with, at least at the onset. Every carrier writing program business wants to have as much flexibility as possible to continue to add new programs and program administrators. Based on the experience of our actuarial consulting and state filings experts with various Departments of Insurance (“DOIs”) across the majority of lines, we describe below the most efficient way to set up nationwide filings and minimize the possibility of material compliance concerns.

What is program business?

According to the Target Markets Program Administrators Association, Program Business is defined as insurance products targeted to a niche market or class, generally representing a book of similar risks placed with one carrier. The administration of the program is done through Program Specialists, often referred to as program administrators or managing general agents (“MGAs”), who have developed expertise in that market or class. Although administrative responsibilities are negotiated between the Program Specialist and carrier, the responsibilities of the Program Specialist include underwriting selection, binding, issuing, billing, and oftentimes marketing, premium collections, data gathering, and claims management/loss control.

Bureau “Base” Program Filings

For the standard commercial lines, program business typically uses Insurance Services Office (“ISO”) or other rating bureaus for loss cost/rates, rules, and forms, but program business can be more than the standard commercial lines and can span across almost all Property & Casualty lines of business.

Some carriers choose to set up a “Base” program (usually for commercial lines) that any program administrator can use. For example, a Base program, such as commercial general liability, might adopt all the bureau loss costs, rules, and forms. There is no need to make a filing that is specific to a single program administrator or target market/class of business. This gives the program administrator the ability to start writing immediately rather than waiting for program filings to be prepared, submitted, and approved for their specific program.

According to our actuarial consulting experts, the Base program generally has rating flexibilities such as multi-tiering and a schedule rating plan, so the carrier can appropriately price the various markets and classes of business written by the carrier’s program administrators. If there are specific rates and forms that are required for a target market or class of business, the carrier will prepare and submit filings for these program-specific rates and forms. Generally, these are miscellaneous items that can be added on to the Base program and are simpler / quicker from a state filings standpoint compared to one with a complete program.

One of the drawbacks of the Base program filing approach is that changes have the potential to impact all program business. If a carrier is adopting an ISO loss cost change, one of their program administrators may not want to adopt the loss cost because of the impact on their specific niche market. Under this scenario, the carrier may file an exception in the Base program and carve out this specific market by having independent loss cost or rates for the impacted class of business. For the Base program approach, every time the carrier is filing a change to the Base program, they need to assess the impact on all their program business.

Program Business Filings

Rather than have all the program administrators use the same Base program filing, a carrier may elect to file each program separately. If a carrier chooses to also file a Base program, the program business filings are typically underneath the main Base program. This means that eligible risks are written in the program business filings and other risk are written in the Base program. The program business filings and the Base program filing are independent of each other in terms of bureau loss cost, rules, forms and company exceptions. When carriers have program business filings, they generally give the program business filing a special program name, like “Small Contractors Program”, with distinct eligibility guides to distinguish it from other programs the carrier may already have in place.

Under the program business filing approach, new program filings (rates, rules and forms) are needed for each new program administrator and it takes longer to get the program to market.  However, our actuarial consulting experts have stated that structuring it this way makes the process much cleaner for rate revisions and program changes as no program filing is connected in any way to another under the same line of business.

Having your program filings connected to the Base program, although it can be done, generally causes issues. First off, many DOIs do not permit references (or links) to another program which makes tracking of these “links”, and lack thereof, difficult from a compliance perspective. In addition, if you make a change to the Base program, it could impact all linked programs which could potentially result in the same drawback mentioned for Base program and the change may not be desired by all program administrators.

Concerns with overlapping programs

Based on the experience of our actuarial consulting experts, multiple states have issues with a single carrier having multiple programs under the same line of business that could potentially offer the same insured different premiums for the exact same coverage. Many times the argument is made that these “programs” are independently run by separate management teams, so there is no insurance offering to the same insured by the same individuals. This argument does not always work and is problematic in California along with some other states. In addition, there are some states, such as California, that take this one step further in that no program can overlap within an entire insurance group, not just the individual carrier. When writing multiple programs for the same line of business under a single carrier, there are typically a few ways to differentiate programs in order to not run into state filing issues, which include the below.

  1. Mutually exclusive underwriting guidelines

You are permitted to have multiples programs in all states if the underwriting guidelines are mutually exclusive, meaning no exposure overlaps between any approved program. For example, you could have a long haul trucking commercial auto program and a public auto commercial program, or from a personal lines standpoint, you could have one program that requires a usage-based insurance (“UBI”) device connected to the vehicle that tracks mileage, speed, breaking, etc. which impacts the driver’s premium and a regular program that does not have a UBI device requirement.

  1. Material mandatory coverage differences

Multiple programs with similar exposures may be allowed to the extent that the programs have material mandatory coverage differences.   For example, you could have an HO-5  (Comprehensive Form) homeowners program and an HO-3 (Special Form) homeowners program, since an HO-5 program is meant to be more expensive because the policy form is much broader than the HO-3 policy form.  Issues can arise if the HO-5 premium is lower than HO-3 for the same risk.  Additionally, if an applicant is eligible for both programs, the carrier must make both programs available to the applicant.

  1. Different Distribution channels

Carriers may use distribution channels to differentiate programs, which include commission-based programs written by independent or captive agents and direct programs, with no commission, which are often sold on the internet.

Multiple Carriers

If an insurance group has more than one admitted carrier, the same, or similar programs can be filed under each carrier with none of the above issues occurring, except in a few states, based on our state filings experience. As was mentioned above, there are some states that look at the entire insurance group, not just the carrier.

Workers Compensation Issues

This line of business is different than other lines. In most states, due to statutory or other requirements, carriers may only have one program and must offer the same rates to everyone for standard (guaranteed cost) business. Therefore, a carrier that might have multiple commercial auto programs under the same carrier, can only have one program for workers compensation. In some jurisdictions, carriers can file to enhance the bureau rating structure, vary the rates offered within their single program, and individually rate certain qualifying risks.

Do you need guidance on maximizing the number of programs you can write under a single carrier in your personal or commercial lines rating plans? Our actuarial consulting and state filings experts at Perr&Knight are here to help.