06-004804 National States Insurance Company vs. Office Of Insurance Regulation Status: Closed Recommended Order on Friday, June 15, 2007.

Summary: Petitioner`s rate request exceeds the legal rate prescribed by Section 627.9407(7)(c), Florida Statutes. Recommend that the request be denied.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NATIONAL STATES INSURANCE ) )

COMPANY, )

)

Petitioner, )

) Case No. 06-4804

vs. )

)

OFFICE OF INSURANCE REGULATION, )

)

Respondent. )

RECOMMENDED ORDER

Pursuant to notice, Administrative Law Judge Don W. Davis

conducted a final hearing in the above-captioned matter on

April 16 and April 18, 2007, in Tallahassee, Florida, at the

Division of Administrative Hearings (DOAH).

APPEARANCES

For Petitioner: Cynthia S. Tunnicliff, Esquire

Brian A. Newman, Esquire

Pennington, Moore, Wilkinson,

Bell and Dunbar, P.A.

215 South Monroe Street, Second Floor

Post Office Box 10095

Tallahassee, Florida 32302-2095

For Respondent: Charlyne Khai Patterson, Esquire

Assistant General Counsel

Office of Insurance Regulation

200 East Gaines Street

612 Larson Building

Tallahassee, Florida 32399-4206

STATEMENT OF THE ISSUES

Whether the Office of Insurance Regulation (the Office)

correctly calculated the New Business Rate in accordance with

statutory authority provided by Section 627.9407(7)(c), Florida

Statutes, with regard to National States Insurance Company’s

(National States or Company or Insurer) request for a rate

increase.

PRELIMINARY STATEMENT

National States engaged in the sale of the Home Healthcare

Care (HHC) policies from 1985 through 2003. The instant

litigation regards premium rates to be charged on the HHC

policies remaining in effect. The HHC policies provide for home

health care benefits in stand-alone policies. The present

matter arises from rate filing FLR 06-10794, submitted to the

Office by National States for a 48 percent rate increase for

those HHC policies.

In a letter to National States dated September 26, 2006,

the Office actuary assigned to review the 06-10794 National

States rate filing for the HHC policies denied approval of the

requested rate increase on the basis that the proposed rate

schedule did not comply with the requirements of Section

627.9407 (7)(c), Florida Statutes, and that existing and

proposed rate schedules were also significantly in excess of

current new business rates in Florida.

National States’ amended petition challenging the Office’s

disapproval was forwarded to DOAH on November 28, 2006.

At the final hearing, National States offered testimony of

two witnesses and six exhibits which were admitted into

evidence.

The Office offered the testimony of two witnesses and four

exhibits which were admitted into evidence.

The record remained open for submission of written proffers

for a period of ten days following the final hearing. Due to a

misunderstanding by counsel for the Office, permission for a

subsequent proffer of intended testimony was permitted after

that time in accordance with the agreement of the parties and

pursuant to order of the undersigned entered on May 16, 2007.

The parties requested and were granted leave to file

proposed recommended orders more than ten days after the filing

of the transcript. Both parties filed such proposed recommended

orders which have been reviewed and utilized in the preparation

of this Recommended Order.

References to Florida Statutes are to the 2007 edition

unless otherwise noted.

FINDINGS OF FACT

1. National States is an insurance company licensed in the

State of Florida to engage in the sale of health insurance.

National States has been in business since 1964, and currently

sells life and health insurance products in 33 states.

2. National States currently has four HHC policy forms in

force in Florida: HNF-1, HNF-3, HHC-1 and HNC-1 (collectively

referred to as the AHome Health@ policies).

3. The Home Health policies pay benefits for home nursing

care on an expense incurred basis up to the daily maximum

specified for periods of 12, 24 or 36 months for the HNF-1 and

HNF-3 policies; 12,24,36,48 or 60 months for the HHC-1; and 12

or 24 months for the HNC-1 policy. All policies under HNF-1,

HNF-3 and HNC-1 policy forms are in renewal only.

4. The Home Health policies are guaranteed renewable and

cannot be canceled due to poor financial performance of the

product. Rates can, however, be increased with the approval of

the Office.

5. The Home Health policies are known as "stand alone home

health care policies" because they provide benefits for care in

the policyholder's home as opposed to care provided in an

institution such as a nursing home.

6. The policy forms identified in the rate filing are not

currently sold by National States, and are defined as a “closed

block” of business, meaning that no new policies are being

issued.

7. Under the policy forms in issue in this proceeding,

each time a renewal premium is received, another contract term

begins which precludes any impairment of a prior contract, per

the following language:

This policy may be renewed for another term

by the payment, . . . of the renewal premium

for such term at the rate in effect at the

time of such renewal. We reserve only the

right to change the table of premiums for

this policy and all the policies in this

state. No change in the premium or in this

policy may be made solely by us because of a

change in your health or job, nor solely

because of claims under this policy.

8. On August 16, 2006 National States submitted a rate

filing requesting a rate revision for its Home Health policies.

The requested rate increase in the 2006 filing was 48.1 percent.

9. The Office denied the requested 48.1 percent increase

by National States by a notice of intent to disapprove ("NOI")

issued September 19, 2006.

10. Section 627.9407(7)(c), Florida Statutes, was enacted

on June 20, 2006, and applies to all long term care policies

issued or renewed on or after July 1, 2006.

11. The National States’ rate filing in this case, FLR 06-

10794, is subject to Section 627.9407(7)(c), Florida Statutes.

The policy forms at issue in this case were issued prior to the

enactment of that statute. A guaranteed renewable form cannot

be canceled by the insurer and must be renewed by the insurer as

long as the policy holder continues to pay the requested

premium. National States does, however, have the option under

Section 627.6425, Florida Statutes, to request that the State of

Florida close its entire block of business if its solvency is in

jeopardy.

12. Florida Administrative Code Rule 69O-157.108 was

enacted in 2003, when the Florida Legislature adopted the NAIC

(National Association of Insurance Commissioners) Model Rule of

2000 which states:

(1) An insurer shall provide the

information listed in this subsection for

approval pursuant to Section 627.410,

Florida Statutes, prior to making a long-

term care insurance form available for sale.

* * *

(c) An actuarial certification consisting

of at least the following:

1. A statement that the initial premium

rate schedule is sufficient to cover

anticipated costs under moderately adverse

experience and that the premium rate

schedule is reasonably expected to be

sustainable over the life of the form with

no future premium increases anticipated;

2. A statement that the policy design and

coverage provided have been reviewed and

taken into consideration;

3. A statement that the underwriting and

claims adjudication processes have been

reviewed and taken into consideration;

4. A complete description of the basis for

contract reserves that are anticipated to be

held under the form, to include:

a. Sufficient detail or sample calculations

provided so as to have a complete depiction

of the reserve amounts to be held;

b. A statement that the assumptions used

for reserves contains reasonable margins for

adverse experience;

c. A statement that the net valuation

premium for renewal years does not increase;

and

d. A statement that the difference between

the gross premium and the net valuation

premium for renewal years is sufficient to

cover expected renewal expenses; or if such

a statement cannot be made, a complete

description of the situations where this

does not occur;

13. Section 627.9407(7)(c), Florida Statutes, applies

universally to all carriers selling long term care insurance in

the state of Florida. For carriers currently issuing coverage

(i.e. “open blocks” of business), the new business rate is

determined by that insurer's book of business so that the

premium charged to existing insureds will not exceed the premium

charged for a newly issued insurance policy except to reflect

benefit differences.

14. For insurers not currently issuing new coverage (i.e.

“closed blocks” of business), the new business rate shall be as

published by the Office at a rate representing the new business

rate of insurers representing 80 percent of the carriers

currently issuing policies with similar coverage as determined

by the prior calendar year earned premium. § 627.9407(7)(c),

Fla. Stat.

15. Dan Keating, acting Chief Actuary for the Office,

authored the NOI at issue in this proceeding. He is a Fellow of

the Society of Actuaries with over 36 years of experience and

has reviewed between 250 to 300 rate filings in the state of

Florida. His testimony establishes that market share is a

percentage that represents how much a particular carrier’s sales

are represented in the market. Each carrier’s percentage of the

market is based on earned premium of the total volume of that

particular share of the market.

16. Market share theory should be used to determine which

carriers represented 80 percent of the market share. Any other

type of average would give too much weight to one company who

might only sell one percent of the policies in the market.

17. Florida premiums should be used to determine which

companies represent the 80 percent market share. The Office

instigated a data call to all carriers doing business in Florida

to respond with confirmation that they were selling long term

care business and to provide their premium information. The

request was separated according to the definition for similar

benefits which was identified as “facility-only,” “non-facility-

only,” and “comprehensive.”

18. Upon receipt, company data was verified and compared

to the annual reports filed through the NAIC. The steps of the

data call commenced with the publishing of the new business rate

on September 29, 2006. Delays in publishing the new business

rate were caused by the time allotted from enactment (June 20,

2006) to effective date (July 1, 2006), the type and amount of

data requested, difficulty in getting companies to respond,

review of the data once received, and the action of calculating

the market share.

19. Calculation to determine which companies represent the

80 percent market share, a necessity pursuant to compliance with

Section 627.9407(7)(c), Florida Statutes, also required a review

in this case of each companies’ first-year earned premium by

personnel of the Office. Such a review of first-year earned

premium is the proper basis to begin the calculation.

20. Three companies were used to comprise the 80 percent

market share: Banker’s Life & Casualty, Penn Treaty and

Colonial American were chosen. Banker’s Life & Casualty,

however, alone comprised 80 percent of the market share and

would have been sufficient used alone. Nevertheless, in the

interest of diversity and variance, and so that the new business

rate would not rely solely on one company’s rate book, Penn

Treaty and Colonial American rates were added to the market

share.

21. By adding the two additional companies, the new

business rate was increased to some degree because both of the

other companies were charging more. Banker's Life remained the

major shareholder. A weighted average was then applied to the

rates of each company to calculate a new business rate.

22. Banker’s Life originally submitted data for the size

of their premium (not the premium rates) that were based on its

nationwide numbers. This error was not discovered until January

2007, after the new business rates were already published and

affected the percentage of weight each company's rates were

given. When the error was corrected, Banker’s Life remained

above 80 percent of the market share as required by the

statutory language of Section 627.9407(7)(c), Florida Statutes.

23. The Office recalculated the new business rate based on

the corrected Florida data which increased the new business rate

minimally, but not significant enough to warrant a change to the

published rates.

24. The Office disapproved National States’ rate filing

because approving the filing would have resulted in a premium

charged that would have exceeded the new business rate allowed

in accordance with Section 627.9407(7)(c), Florida Statutes.

25. Although the percentages differ from one issue age to

another, National States current rates without the increase, in

the best case scenario, are at least 106 percent above the new

business rate, and in general are on average two and one half

times the new business rate. Each rate is above 100 percent of

the new business rate, indicating that in every situation, for

every issue age on all four policy forms, National States’

current rates, before any increase, are already above the new

business rate.

26. The Bankers Life and Casualty nationwide data was used

to calculate the weighted average because it was the data

provided to the Office in response to the data call. Experts

for both parties concede that access to this data could only be

had via submission by the carriers, as there is no central

depository where this type of data is maintained. The market

share calculation itself was accurate.

27. A conscious decision was made by personnel of the

Office to normalize the new business rate to reflect a 90-day

elimination period because that policy form is the most commonly

sold by the carriers. Banker’s Life does not have a

corresponding rate for a 90-day elimination period; however,

normalizing to Banker’s 42-day elimination period produced a

higher new business rate because a shorter elimination period

raises the cost of the policy since the policy holder can claim

benefits sooner.

28. As with the elimination period, there was a conscious

decision to normalize the new business rate to a tax-qualified

plan because it was the most commonly sold plan.

29. Normalizing the benefits to calculate the new business

rate was done by the use of factors gathered from the carriers

making up the 80 percent market share and then weighted as

required. The factors were available at the time the office

received the data from each company, and prior to the

disapproval of National States’ rate filing.

30. National States' personnel were aware of the new

statute prior to submitting the rate filing to the Office.

Additionally, checks of the Office's website were made in July

and again in August of 2006, in order to identify the new

business rate applicable to this filing. New business rates

were not published on the Office website at that time.

31. National States' actuary concedes that he did not make

any attempt to contact the Office to determine if the new

business rate for stand alone home health care was available

prior to submitting the rate filing to the office, although

doing so would have been relatively easy.

32. National States' actuary offered testimony that

Florida home health care policies have been performing poorly

not just for National States, but for the industry as a whole.

This poor performance occurs when the actual claims experience

that had emerged is much worse than had been expected when

initially pricing the product. He described the pricing process

in terms of the durational loss ratio curve, and how that curve

impacts subsequent filings under Florida law. National States

did not anticipate increasing the premiums at the time the

policies were sold.

33. National States' strategy as outlined by its

actuary is at variance with requirements of Florida

Administrative Code Rule, 69O-149.006(3)(b)23b(IV). Under that

Rule's provision, the actuary is required to project the

experience that he actually expects to occur. For a plan that

was developed more than 15 years ago, it is highly unlikely that

expectations today would match those in the original pricing

product.

34. Rule 69O-149.006(3)(b)23b(IV) reads:

(IV) The projected values shall represent

the experience that the actuary fully

expects to occur. In order for the proposed

premium schedule or rate change to be

reasonable, the underlying experience used

as the basis of a projection must be

reflective of the experience anticipated

over the rating period. The Office will

consider how the following items are

considered in evaluating the reasonableness

of the projections and ultimate rates. In

order to expedite the review process, the

actuary is encouraged to provide information

on how each of the following have or have

not been addressed in the experience period

data used as the basis for determining

projected values, or otherwise addressed in

the ratemaking process.

(A) Large nonrecurring claims;

(B) Seasonality of claims;

(C) Prior rate changes not fully realized;

(D) Rate limits, rate guarantees, and other

rates not charged at the full manual rate

level;

(E) Experience rating, if any;

(F) Reinsurance costs and recoveries for

excess claims subject to non-proportional

reinsurance;

(G) Coordination of benefits and

subrogation;

(H) Benefit changes during the experience

period or anticipated for the rating period;

(I) Operational changes during the

experience period or anticipated for the

rating period that will affect claim costs;

(J) Punitive damages, lobbying, or other

costs that are not policy benefits;

(K) Claim costs paid which exceed contract

terms or provisions;

(L) Benefit payments triggered by the death

of an insured, such as waiver of premium or

spousal benefits;

(M) Risk charges for excess group

conversion costs or other similar costs for

transferring risk;

(N) The extent and justification of any

claim administration expenses included in

claim costs; and

(O) Other actuarial considerations that

affect the determination of projected

values.

35. Testimony of National States' actuary is not credited.

CONCLUSIONS OF LAW

36. The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter of this

proceeding. §§ 120.569 and 120.57, Fla. Stats.

37. National States’ requested 48.1 percent rate increase

is above the calculated new business rate.

38. Section 627.410(6), Florida Statutes, provides:

(6)(a) An insurer shall not deliver or issue

for delivery or renew in this state any

health insurance policy form until it has

filed with the office a copy of every

applicable rating manual, rating schedule,

change in rating manual, and change in

rating schedule; if rating manuals and

rating schedules are not applicable, the

insurer must file with the office applicable

premium rates and any change in applicable

premium rates. . . .

(b) The commission may establish by rule,

for each type of health insurance form,

procedures to be used in ascertaining the

reasonableness of benefits in relation to

premium rates . . . .

39. Section 627.9407, Florida Statutes, necessarily

requires that the Office publish its new business rate for those

carriers no longer issuing new long term care coverage.

40. Section 627.9407(7)(c), Florida Statutes provides:

Any premium increase for existing insureds

shall not result in a premium charged to the

insureds that would exceed the premium

charged on a newly issued insurance policy,

except to reflect benefit differences. If

the insurer is not currently issuing new

coverage, the new business rate shall be as

published by the office at the rate

representing the new business rate of

insurers representing 80 percent of the

carriers currently issuing policies with

similar coverage as determined by the prior

calendar year earned premium.

41. Section 627.9407(7)(c), Florida Statutes, provides an

independent definition of a rate level that is defined to be

excessive, and is an additional test for determining a level of

excessiveness. Those provisions preclude a carrier from

charging a premium rate that is above the published new business

rate.

42. In accordance with Section 627.410(6)(b), Florida

Statutes, the Office drafted Rule 69O-157.301 to establish a

framework for evaluating rate increases for long term care

insurance, and to ensure that the rate increases are not

excessive. The Notice of Proposed Rule Development was

published in the Florida Administrative Weekly and scheduled for

workshop on May 2, 2007.

43. Under provisions of Section 120.57 (1)(e), Florida

Statutes, any agency action that determines the substantial

interests of a party, based on an unadopted rule, must explicate

that policy in the course of formal administrative proceedings.

44. The Office must demonstrate that the unadopted rule:

a. Is within the powers, functions, and

duties delegated by the Legislature or, if

the agency is operating pursuant to

authority derived from the State

Constitution, is within that authority;

b. Does not enlarge, modify, or contravene

the specific provisions of law implemented;

c. Is not vague, establishes adequate

standards for agency decisions, or does not

vest unbridled discretion in the agency;

d. Is not arbitrary or capricious. A rule is

arbitrary if it is not supported by logic or

the necessary facts; a rule is capricious if

it is adopted without thought or reason or is

irrational;

e. Is not being applied to the substantially

affected party without due notice; and

f. Does not impose excessive regulatory

costs on the regulated person, county, or

city

45. The actions of the Office in establishing the new

business rate are within the powers, functions and duties

delegated to it by the legislature. § 627.9407(7)(c), Fla Stat.

46. The Office reviewed the first-year earned premium of

carriers currently selling business in the State of Florida and

determined that Bankers was the predominant seller in the market

place and, alone, represented more than the 80 percent market

share as required by the statute.

47. The Office added Penn Treaty and Colonial American,

representing the number two and three carriers selling HHC

policies in Florida, as determined by first-year earned premium,

to the market share, not wanting to have the new business rate

rely solely on one carrier’s rate book.

48. The actions of the Office did not enlarge, modify, or

contravene the specific provisions of the laws implemented.

49. The actions of the Office were not vague, because the

statute provides an adequate standard for agency action. The

language of the statute is not ambiguous. The statute requires

the office to publish a new business rate representing 80

percent of the carriers issuing new coverage as determined by

prior calendar year earned premium. The new business rates were

calculated and published accordingly.

50. The action of the Office was not arbitrary or

capricious because its actions are supported by logic or the

necessary facts, and was not adopted without thought or reason.

51. The Office met the requirements imposed upon it in

this proceeding in accordance with requirements of Section

120.57(1)(e), Florida Statutes.

52. National States is not required to continue to do

business in Florida at a loss. Under Section 627.6425, Florida

Statutes, National States can request that the state close its

entire block of business if its solvency is in jeopardy.

53. The Office correctly calculated the new business rate

in accordance with the statutory authority provided by Section

627.9407(7)(c), Florida Statutes.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that a final order be entered denying

National States' requested rate increase.

DONE AND ENTERED this 15th day of June, 2007, in

Tallahassee, Leon County, Florida.

S

DON W. DAVIS

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 15th day of June, 2007.

COPIES FURNISHED :

Cynthia S. Tunnicliff, Esquire

Brian A. Newman, Esquire

Pennington, Moore, Wilkinson,

Bell and Dunbar, P.A.

215 South Monroe Street, Second Floor

Post Office Box 10095

Tallahassee, Florida 32302-2095

Charlyne Khai Patterson, Esquire

Assistant General Counsel

Office of Insurance Regulation

200 East Gaines Street

612 Larson Building

Tallahassee, Florida 32399-4206

Kevin M. McCarty, Commissioner

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399-0305

Steve Parton, General Counsel

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399-0305

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.