05-003595 National States Insurance Company vs. Office Of Insurance Regulation Status: Closed Recommended Order on Friday, July 7, 2006.

Summary: The evidence showed that Petitioner is entitled to a 38 percent rate increase; the shock lapse theory is rejected; and the credibility rules are discussed.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NATIONAL STATES INSURANCE )

COMPANY, )

)

Petitioner, )

)

vs. ) Case No. 05 - 3595

)

OFFICE OF INSURANCE REGULATION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to Notice, a final hearing was held in this matter

before Administrative Law Judge Diane Cleavinger of the Division

of Administrative Hearings on March 8, 2006, in Tallahassee,

Florida.

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

Tallahassee, Florid a 32302 - 2095

For Respondent: James H. Harris, Esquire

Office of Insurance Regulation

200 East Gaines Street

612 Larson Building, Room 645A - 5

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

Whether National States Insurance Company should be granted

a rate increase for its four home health care policy forms HNF -

1, HHF - 3, HNC - 1, and HHC - 1 (HHC policies).

PRELIMINARY STATEMENT

Petitioner filed a Petition for Formal Heari ng with the

Respondent seeking a 53 percent rate increase for its HHC

policies. However, the Department found that the original

Petition did not allege any disputed issues of material fact and

declined to forward the original Petition to the Division of

A dministrative Hearings. Thereafter, Petitioner filed an

Amended Petition for Formal Hearing, again seeking a rate

increase for its HHC policies and challenging Respondent’s

failure to f orward the original Petition. Respondent referred

the Amended Petitio n to the Division of Administrative Hearings,

thereby making moot the issue of forwarding the original

Petition in this case.

At the hearing, Petitioner presented the testimony of

actuaries, Karl Volkmar and Rex Durrington. Petitioner also

offered th ree exhibits into evidence. Respondent offered seven

exhibits into evidence, and presented the testimony of actuaries

Daniel Keating and Robert Yee.

After the hearing, Petitioner filed a Proposed Recommended

Order on April 12, 2006. Likewise, Resp ondent filed a Proposed

Recommended Order on April 12, 2006.

FINDINGS OF FACT

1. Petitioner, National States Insurance Company (National

States) is licensed in the State of Florida to sell health

insurance, including home health care policies without nurs ing

home care and policies that combine home health care and nursing

home care (PAL policies). The two types of policies are not the

same, but overlap somewhat when both types of care are combined

in PAL policies. Generally, in Florida, HHC policies have had

higher claims and worse profitability than HHC policies in other

states.

2. Respondent, the Office of Insurance Regulation (OI R ) ,

is a sub - unit of an agency of the State of Florida. Respondent

is charged with the responsibility for, among other things, the

review and approval of health insurance rate increases for

health insurance policy forms used in Florida. See § 627.410,

Fla. Stat.

3 . No "basic insurance policy" may be delivered in Florida

unless the "form" has first been approved by the D epartment.

§ 627.410(1), Fl a. Stat.

4 . Section 627.410(6), Florida Statutes, additionally

requires that a copy of the applicable rating manual or rating

schedule included as part of an insurance policy form must be

filed with the Department for approval before any "health

insurance policy form" is delivered in Florida.

5 . Pursuant to Section 627.410(7)(a), Florida Statutes,

insurers required to file rating manuals or rating schedules

pursuant to Section 627.410(6), Florida Statutes, must make an

"annual filing" with the D epartment.

6 . The "annual filing" requirement of Section

627.410(7)(a), Florida Statutes, may be satisfied in two ways:

a. A "rate filing prepared by an actuary which contains

documentation demonstrating the reasonableness of benefits in

relation to premiums charged in accordance with the applicable

rating laws and rules promulgated by the department."

§ 627.410(7)(b)1 . , Fl a. Stat . ; or

b. "If no rate change is proposed, a filing which consists

of a certification by an actuary th at benefits are reasonable in

relation to premiums currently charged in accordance with

applicable laws and rules promulgated by the department."

§ 627.410(7)(b)2 . , Fl a. Stat.

7 . In this case, National States filed a request for a 53

percent rate i ncrease for several of its Limited Benefit Home

Nursing Policy forms, HNF - 1, HNF - 3, HNC - 1 and HHC - 1 (HHC

policies), on May 31, 2005.

8 . The HHC polices, involved in the rate request, are

individual polices written on a guaranteed renewable basis. The

amount of the premium is not guaranteed. These policies pay

benefits for home nursing care on an expense - incurred basis up

to the daily maximum specified in the policies 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 policy ; and 12 or 24 months

for the HNC - 1 policy. The policies do not provide benefits for

nursing home care.

9 . Policies under these forms are not currently sold in

Florida. The HHC - 1 plan was sold through February 28 , 2003 ; the

HNF - 1 plan was discontinued on April 1, 1994 ; the HNC - 1 plan was

discontinued in 1991 and the HNF - 3 plan was discontinued on

June 30, 1999. There are 4,361 Florida policies remaining in

force that would be affected by the rate increase request ed by

National States.

1 0 . Dan Keating was the actuary assigned by Respondent to

review the requested rate increase. On June 8, 2005, and on

June 15, 2005, Respondent requested revised calculations of

earned premiums to reflect the impact of prior rate increases in

all calendar years. It also requested one exhibit reflecting

historical experience, current premiums and projected future

experience assuming no rate increase. National States responded

to these requests. The June 15, 2005, letter als o requested an

explanation of a report given by a National States' actuary to

the Missouri Department of Insurance in a confidential

proceeding regarding the company's original pricing assumptions

for the policies. The deadline for review was extended to

July 15, 2005.

11. Twenty - two days before the review deadline, Respondent

determined that the requested increase would be disapproved. In

a letter to National States dated June 24, 2005, Respondent

stated three reasons for disapproval of the HHC fil ing:

(1) the company has failed to demonstrate that the

proposed rates are reasonable in relation to the

benefits provided in that the data supplied by the

company does not justify the rate increase requested.

As required by Florida Administrative Code Rule 690 -

149.005(2)(b)1 the rate increase is subject to both a

future and a lifetime A/E ratio test. The starting

point for the future projected experience is based on

the combined data over the period used to determine

credibility of the data, as define d in Florida

Administrative Code Rule 690 - 149.0025(6) not just the

last experience period;

(2) the company has used inconsistent methods in

calculating the expected loss ratio used to compare

with actual experience in determining the

reasonableness of t he rates. The expected loss ratio

is based on the durational loss ratio table provided

by the company at the time the policy is originally

approved and the historical distribution of business.

However, each exhibit provided by the company

reflected diffe rent expected loss ratios for the same

block of business; and

(3) the company failed to adequately respond to the

Office's request for additional information regarding

the original pricing assumptions used for this long -

term care policy form, as require d by Florida

Administrative Code Rule 690 - 149.

However, post - disapproval , information on the original pricing

assumptions requested by Respondent were given to Respondent .

The original pricing assumptions were shown not to have changed

and not to be rele vant to the issues involved in this case. For

the same reason, questions regarding the Missouri hearing

regarding the original pricing information on these policies

were irrelevant to the issues involved in this case. At the

formal hearing, Respondent af firmed the above facts. Moreover,

the original pricing assumptions were given to Respondent’s

predecessor when the initial approval of these forms was made

and was presumably available to the Respondent in its own

records. Failure to provide information that the Respondent

already has cannot, on these facts, form a basis for disapproval

of National States rate request. Therefore, the third basis for

disapproval of Petitioner’s rate request is essentially moot .

12. The first ground for disapproving the requested rate

increase involves the “credibility” of the data used by National

States in its rate filling. “Credibility” is a term of art in

ratemaking that refers to how much weight or reliance an insurer

can place on historical data to make project ions about the

future. The goal for a credibility standard is to generally

require that the historical data being used, such as the amount

and number of claims, cover a sufficient period of time and is

in sufficient numbers to form a basis to reliably pre dict the

ratio of “actual projected” claims to “expected” claims (A/E

ratio). In short, how far back in time an insurer must go to

gather enough claims to reliably predict the number of claims it

expects in the future. The A/E ratio is used to determine if a

premium rate increase is needed. If the ratio is greater than

one and based on credible data then a rate increase is

indicated.

13. The Respondent has developed various rules defining

credibility. See Fla. R. C ivil Proc. 69O - 149.006(3) and 69O -

149.0025(6). The rules are, in par t, based on studies done by

actuarial professional organizations to determine when

historical insurance data reliably predicts future rates and

various claims characteristics of specific types of policies.

Indeed, exper t testimony indicated that , generally , a minimum of

1082 claims would be necessary to establish credibility for

long - term care type policies, including HHC - type policies . All

the parties agree that the credibility rules appl y to National

States rate filin g.

14. Florida Administrative Code R ule 69O - 149.006( 6 )

states:

(6) Credible Data:

(a) Except as provided in paragraph (b), if a policy

form has 2000 or more expected policies in force, then

full (100 percent) credibility is given to the

experien ce; if fewer than 500 policies are in force,

then 0 percent credibility is given.

(b)1. For policy forms with low expected claims

frequency, such as accident and long term care, at

least 1000 claims, over a period not exceed the most

recent 5 - year period , shall be assigned 100 percent

credibility; 200 claims shall be assigned 0 percent

credibility.

The practical difference between the above sections is that each

section defines the period of time that an insurer must go back

in order to rely on its claim s data. In this case, the parties

disagree over which credibility rule applies; and therefor e,

over the length of the time period that should be included in

the rate filing. Respondent treated the HHC policies as low

expected claims frequency policies an d applied the credibility

rule contained in S ubsection (b)1. The application of that

subsection resulted in 1260 claims from 2003 through the first

quarter of 2005 being included in the Respondent’s calculation s .

The evidence did not demonstrate the reas on the Respondent used

more than 1000 claims in its calculations. However, there was

no evidence that the additional numbers had a significant impact

on the amount of any rate increase. On the other hand, National

States claims that these policies are no t low expected claims

frequency policies and applied S ubsection (a). The application

of S ubsection (a) resulted in only 63 claims in the first

quarter of 2005 being included its calculation s . This is a very

small sample given the numbers contained in the credibility

rules.

15. The evidence showed that National States has more than

200 0 policies in force and that it has at least 1000 claims

during the most recent five - year period. The question is

whether the HHC policies are low expected claims freq uency

policies. The rules do not define the term “low expected claims

frequency.” The actual experience of the HHC policies by

Nation al States is that the number of claims has been neither

high or low, but in the mid - range level. The experts disagreed

o ver whether these policies were low expected claims frequency

policies. The better expert evidence showed that HHC policies

are generally considered to be low expected claims frequency

policies. Additionally , National States in another filing

r epresented the HHC - 1 form as having the same low frequency

assumptions as the home health care component of PAL combination

policies. Finally, Respondent has interpreted the term to refer

to the expectations at the time the policy is originally priced .

The later - a cquired actual experience of the company is not

relevant to the determination of whether these HHC policies are

low expected claims frequency policies . In short, the original

frequency expectations do not change over time based on actual

experience. The use of the word “expected” in the phrase

supports Respondent ’ s interpretation of the language of its rule

and such an interpretation is reasonable given the language of

the rule and the rational e behind such credibility standards .

Therefore, the appropria te credibility standard for these HHC

policies is that found in S ubsection (b)1.

16. When the correct credibility rule is applied, National

States would be en titled to a minimum rate increase of 38.2

percent using Respondent’s methodology .

17 . The second ground for disapproving the requested rate

increase was inconsistency in the methods used in calculating

the expected loss ratios used to compare with actual historical

data. The inconsistent methods occurred when National States’

actuary use d an incorrect calculation in his initial filing and

then twice attempted to correct that error, at Respondent’s

request, with amended spreadsheets. The inconsistent

calculations involved the method of calculating expected loss

ratios for National States. As indicated in Respondent’s

letter, the expected loss ratio is based on the durational loss

ratio table provided by the company at the time the policy is

originally approved and the historical distribution of business.

18. The durational loss rati o , or durational loss ratio

curve , is established by the company at the time a policy is

first approved and reflects the expected increases in losses

over the life of a product based on the price of the product

when it is first used. In its simplest form, the graph of this

data over time generates a mathematical curve. Likewise, actual

historical data based on an insurance product’s claims v ersus

price over the years generates a curve that can be projected

forward into the future. If these two curves mat ch there is no

need for a price increase to cover future claims. If these two

curves do not match then the price of the insurance product

needs to be adjusted either up or down. It is the difference or

gap between these two curves that is important.

19. In the filing made by National States, three separate

spreadsheets were submitted on three separate occasions. These

spreadsheets are stamped pages 16 (initial spreadsheet), 37

(first amended spreadsheet) and 41 (second amended spreadsheet)

of Petit ioner’s Exhibit 1. The amended spreadsheets were

submitted because Mr. Keating requested that National States

submit such data on a “current” or “constant” premium basis.

The request was not completely understood by National States’

actuary and, in his a ttempt to meet that request, he generated

inconsistent spreadsheets that were incorrect in their

calculations in that the ordinarily unchangeable durational loss

ratio changed. In fact, the second amended spreadsheet was

intended to correct the errors in the first amended spreadsheet.

The third spreadsheet continued to contain errors, but those

errors only involved the historical durational loss ratios and

did not involve the future durational loss ratio projections.

The historical durational loss ratios in the third spreadsheet

changed over time. The future durational loss ratio did not

change over time. After the third attempted correction,

Mr. Keating no longer trusted the figures being submitted by

National States and suspected that they might be us ing a faulty

model for calculating premiums. Use of a faulty model would

call the entire rate filing into question. The analytical

portions of National States’ model were not available to

Mr. Keating and he could not determine the basis for the

differing spreadsheets as either a faulty model or incorrect

calculations. However, the model had been used in the past to

gain approval of other rate increases by National States.

Mr. Keating prepared page 92 of Petitioner’s E xhibit 1 based on

the best interpret ation he could give the National States’ data

and the information about National States that was available to

him. Page 92 demonstrates that National States is entitled to a

38 .2 percent rate increase for the HHC policies based on the

calculations Mr. Kea ting used on data supplied by National

States. In fact, all of the actuaries that reviewed this filing

agreed that National States was entitled to at least a 38.2

percent rate increase.

20. At hearing, National States actuary admitted he made

an err or in his initial spreadsheet and in the first amended

spreadsheet, in part, based on his interpretation of the

requests from Respondent. The second amended spreadsheet

correc ted the first two and generally reflected accurate data

from National States. T he evidence showed that the differing

spreadsheets were not a result of the application of a faulty

model, but were a progressive attempt with errors to meet the

requirements of Respondent. Clearly, Mr. Keating had some

suspicion as to the reasons for the inconsistent spreadsheets

since he was able to use the data from the second amended

spreadsheet along with data contained elsewhere in the rate

filing to determine the amount the rate should inc rease based on

that data. Given the evidence, the inconsiste nt spreadsheets

are not a sufficient reason to justify denial of a rate

increase. Petitioner’s experts corroborate this analysis and

agree that the increase calculated by Mr. Keating is the minimum

increase that is appropriate in this case.

21. The differences among the experts regarding the amount

of the rate increase result from whether “shock lapse” and

“anti - selection” should be applied to National States’ data.

These terms generally describe the phenomenon of policy

cancellation that occurs whe n premiums increase. In the health

area, consumers who cancel policies when premiums increase tend

to be healthier than those who elect to renew their policies.

The result is increased losses for the remaining book of

business. The phenomenon is recogni zed by professional

actuaries, but there is no agreement, in this case, on whether

it should be applied to these HHC policies. Mr. Keating did not

apply any factor for shock lapse and anti - selection. The

Petitioner’s actuary did apply a factor for shock lapse and

anti - selection.

22. P etitioner’s actuary developed the following rate

indications using National States ’ data:

Over 70% increase using the pool of claims developed

under subsection (a) of the credibility rules in its

original rate filing .

Over 51% increase using the 1260 claims used by Mr.

Keating and applying subsection (b)1. of the

credibility rules.

Over 58% increase using only 1000 claims and applying

subsection (b)1. of the credibility rules.

23. There was very little testimony on how any shock lapse

was developed to these HHC policies . Apart from the very vague

and non - scientific “rule of thumb” for the factor related to

shock lapse, there was no evidence showing that these policies

would be currently subject to significant sh ock lapse by

Petitioner’s actuaries , that application of a shock lapse factor

is appropriate for these policies or that some recognized method

to quantify the shock lapse phenomenon was used .

24. Indeed, the evidence in this case indicates that sho ck

lapse should not be applied in this rate filing. National

States, who is most familiar with its own block of business, did

not claim or apply any shock lapse factor in its rate filing

until the hearing in this matter and after the 38.2 percent

increase had been calculated by Respondent. Additionally, since

1999 the premiums for these policies has increased 266 percent

and policyholders have decreased from 16,352 in 1999 to 4,361 in

the first quarter of 2005. Both these facts indicate that the

shock la pse phenomenon has either been realized or is

insignificant in regard to this rate filing and that the

appropriate rate indicated for this filing is a 38.2 percent

increase.

25. Finally, National States offered no pro of

demonstrating that Respondent maintained a non - rule policy

regarding any requirements that original pricing assumptions be

supplied with a rate filing. Indeed, the allegations were an

insignificant part of this case for both parties, but the issue

could not be resolved until evidence was taken. There was no

evidence of frivolousness in the assertion of the claim .

Therefore, even though insignificant, attorney’s fees are not

warranted in this action and the portions of the Amended

Petition in this action related to such non - rule polic y should

be dismissed.

CONCLUSIONS OF LAW

26 . The Division of Administrative Hearings has

jurisdiction over both the parties to and subject matter of this

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

27 . Section 627.410(6), Florida Statute s, provides:

(6)(a) An insurer shall not del i ver 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 chang e 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 he alth insurance form,

procedures to be used in ascertaining the

reasonableness of benefits in relation to

premium rates. . . .

28 . Part I of Chapter 690 - 149, Florida Administrative

Code , specifies the applicable rules for rate filings of health

insur ance policies and is applicable to the HHC policies

involved in this action .

29 . The grounds for disapproval of form s filed under

Section 627.410 are provided in Section 627.411, Florida

Statutes. In pertinent part, Section 627.411(1), Florida

Statu tes, provides that a form may be disapproved if the form:

(a) Is in any respect in violation of, or

does not comply with, this code.

. . . .

(e) Is for health insurance, and provides

benefits which are unreasonable in relation to

the premium char ged, contains provisions which

are unfair or inequitable or contrary to the

public policy of this state or which encourage

misrepresentation or which apply rating

practices which result in premium escalations

that are not viable for the policyholder market

or result in unfair discrimination in sales

practices.

30 . The Department has adopted rules establishing general

rate - filing procedures. Fla . Admin . Code Ch. 69O - 149 (formerly

Chapter 4 - 149). Florida Administrative Code Rule 69O - 149.006

sets out the information an actuary must provide and the manner

in which an actuary is to provide that information. The

Department has also adopted rules providing the manner in which

the reasonableness of benefits in relation to premiums will be

determined. Fla. R. Civil Proc. 69O - 149.005.

31 . Florida Administrative Code Rule 690 - 149.005 specifies

the basic test of "reasonableness of benefits in relation to

premium rates ”:

(1) Benefits will be determined to be

reasonable in relation to the premium rates

ch arged if the premium schedule is not

excessive, not inadequate and not unfairly

discriminatory. In determining whether a

premium schedule satisfies these

requirements, the office will consider all

items presented in the filing with special

emphasis placed on the information included

in the actuarial memorandum.

(2) A premium schedule is not excessive if

the following are true:

(b)1. For individual forms, and group

policy forms other than annually rated group

policy forms, approved on or after 2/1/94 or

issue on or after 6/1/94, the Premium

Schedule satisfies the following:

a. An Anticipated Loss Ratio test such that

the present value of projected claims is not

less than the present value of expected

claims value of over the entire future

lifetime of th e form. This is equivalent to

the present value of the future A/E ratio

not being less than 1.0; and

b. The current lifetime loss ratio, as

defined in subparagraph 690 -

149.006(3)(b)24., F.A.C., is not less than

the initial filed loss ratio for the form as

may be subsequently amended and approved

pursuant to his rule chapter.

32 . Florida Administrative Code Rule 690 - 149.0025(1)

specifies:

(1)(a) Actual - to - Expected (A/E) ratio: The

ratio of actual incurred claims under the

policy f or m divided by e xpected claims.

This is equivalent t o the actual annual loss

ratio divided by the applicable durational

loss ratios of the approved durational loss

ratio table.

(b) For projected periods, the A/E ratio is

the ratio of the projected claims divided by

the expected claims.

(c) Both the year - by - year pattern of the

A/E ratios and the aggregate past, future,

and lifetime ratios shall be presented.

33 . The term "expected claims" is defined by Florida

Administrative Code Rule 690 - 149.0025(10)(a):

(10) Expected Claims:

(a) The actual earned premium or, for

projected periods the projected premium,

times the applicable policy durational loss

ratio from the approved durational loss

ratio table which was in effect for the time

period covered by the premium s.

34 . Florida Administrative Code Rule 690 - 149.006(3)(b) ,

23b(II) establishes the manner in which the insurer display s and

project s future period data when based on actual in force policy

experience, as was done by National States in the instant HHC

rate filing:

23. Experience on the Form (Past and Future

Anticipated): This section shall display

the actual experience on the form and that

expected for the future.

a. Past Experience: Experience from

inception (or the last 3 years for annually

rated group coverage's) shall be displayed,

although, with proper interest adjustment,

the experience for calendar years more than

10 years in the past may be combined.

Excluding annually rated group policy forms,

earned premiums, actual incurred and

expected claims experience shall also be

displayed, for each policy year or issue

year, within the calendar year. The

following information shall be displayed (A

sample experience exhibit is illustrated in

Appendix A, Illustrative Experience Exhibit

(2/04), which is hereby incorporated by

reference):

(I) Year,

(II) Earned premium,

(III) Paid claims, for past periods only

(IV) Change in claim liability and

reserve, for past periods only. These

reserves shall be updated to reflect actual

claim runoff as it develops.

(V) Incurred claims (=(III) (IV)),

(VI) Incurred loss ratio (=(V)/(II)),

(VII) Expected loss ratio,

(VIII) Expected incurred claims,

(IX) Actual - to - expected claims

(=(V)/(VIII)) or equivalency (=(VI)/(VII)),

(X) Earned premi um on a manual rate basis

for at least the past 5 calendar years or

the experience period used for projection

purposes for annually rated group products;

i.e., removing the impact of adjustments to

the approved rate manual due to underwriter

adjustments, t he impact of any rate limits,

and experience rating. . . .

(XI) Earned premium on a current rate

basis for at least the past 5 calendar years

or the experience period used for projection

purposes of annually rated group products. .

. .

b. Future pe riods where the projected

values are based on in force experience:

(I) The experience period used as the

basis for determining projected values shall

be clearly indicated.

(II) The experience period shall reflect

the most current date available, gen erally

the most recent 12 months for coverage

subject to medical inflation or the period

of time to determine credible data pursuant

to subsection 690 - 149.0025(6), F.A.C.

(III) An exhibit showing the development of

the expected claims and A/E ratio for t he

experience period shall be provided. (A

sample exhibit demonstrating an expected

development is illustrated in Appendix A).

(IV) The projected values shall represent

the experience that the actuary fully

expects to occur. In order for the proposed

p remium 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 o ffice will

consider how the following items are

considered in evalua ting 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 ch arged 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 experie nce

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

transfer ring 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.

(V) The method or formulas, including

necessary assump tions and sample

calculations, used in determining the

projected values from the experience period

used shall be provided.

(VI) Projection years shall include columns

I, II, V, VI, VII, VIII and IX as indicated

in sub - subparagraph 23.a. above.

(VIII) A summary of the historical and

projected data shall be provided for all

experience columns providing the accumulated

past values, future values, and lifetime

values both with and without interest and

with and without the proposed rate change.

35. Be cause medical inflation or trend is already included

in the HHC policies pricing assumptions , Florida Administrative

Code Rule 690 - 149.006(3)( b ) , 23 requires National States to use

"credible data" as defined by Florida Administrativ e Code Rule

690 - 149.0025 (6) to determine the experience period on which a

projection of future values is to be based. Florida

Administrative Code Rule 69O - 149.006( 6 ), states:

(6) Credible Data:

(a) Except as provided in paragraph (b), if

a policy form has 2000 or more expecte d

policies in force, then full (100 percent)

credibility is given to the experience; if

fewer than 500 policies are in force, then 0

percent credibility is given.

(b)1. For policy forms with low expected

claims frequency, such as accident and long

term care, at least 1000 claims, over a

period not exceed the most recent 5 - year

period, shall be assigned 100 percent

credibility; 200 claims shall be assigned 0

percent credibility.

36 . In this case, the evidence demonstrated that the data

supplied by National S tates was sufficient to use in determining

if a rate increase should be approved, even though the data

contained some immaterial errors. The evidence also

demonstrated that the HHC policies were forms with low expected

claims frequency . Fina lly, the evidence did not demonstrate

that any factor for shock lapse should be applied to this rate

filing.

37. Florida Administrative Code Rules 690 - 149.006(3)(b) ,

23b(II) and 690.149.0025(6) require that National States project

forward expected cl aims based on S ubsection (b)1. of that Rule.

By applying S ubsection (b)1. of the credibility rules National

States is entitled to a 38 percent rate increase .

38 . Further , Respondent admitted that the original pricing

assumptions for the HHC policies have remained unchanged.

Therefore , the request for such information by Respondent and

the issue of whether that information was timely provided by

National States is moot in this de novo hearing and immaterial

as to whether Petitioner should be granted a rate increase. See

Beverly Enterprises - Florida, Inc. v. Department of health and

Rehabilitative Services , 573 So. 2d 19 (Fla. 1 st DCA 1990);

Young v. Department of Community Affairs , 625 So. 2d 831 (Fla.

1993); and Hamilton County Board of County Commis sioners v.

Department of Environmental Regu lation , 587 So. 2d 1378 (Fla.

1 st DCA 1991) . The issue would be different if National States

had never supplied the requested information up to and through

the hearing. However, the information was supplied. Gi ven this

lack of materiality, Natio n a l States ’ rate request should not be

disapproved on the basis that such immaterial information was

not timely supplied , especially since such original rating

assumptions had been previously provided when the HHC policie s

were initially approved .

39. Finally, i n it s P etition, National States alleged that

Respondent’s request for additional information, specifically

OIR's request for original pricing assumptions, was an unadopted

rule.

40. A "rule" is define d by Section 120.52(15) , Florida

Statutes:

(15) "Rule" means each agency statement of

general applicability that implements,

interprets, or prescribes law or policy or

describes the procedure or practice

requirements of an agency and includes any

form whi ch imposes any requirement or

solicits any information not specifically

required by statute or by an existing rule.

In a proceeding to challenge an unadopted rule, P etitioner has

the burden of going forward and of proving the allegations of

the agency's u se of an unadopted rule. See §§ 120.56(4)(b);

120.57(1)(e), Fla. Stat.; St. Johns River Water Management Dist.

v. Consolidated - Tomoka Land Co. , 717 So. 2d 72, 76 (Fla. 1st DCA

1998). However, National States failed to plead or offer any

proof that OIR ’ s request for the original pricing assumption was

"an agency statement of general applicability."

41 . In Dept. of Highway Safety and Motor Vehicles v.

Schluter , 705 So. 2d 81 (Fla. 1st DCA 1997), an administrative

law judg e determined that six statem ents stipulated by the

Department of Highway Safety and Motor Vehicles ("DHSMV") were

"rules." However, it was also stipulated that the first three

statements only were applied by DHSMV "in certain

circumstances." The First District Court of Appeal reaso ned:

We agree with appellant that the first three

of the six policies do not constitute rules.

They cannot be considered statements of

general applicability because the record

establishes that each was to apply only

under certain circumstances.

Having fa iled to meet its burden of coming forward with proof of

"general applicability," National Sta tes ’ claim of non - rule

policy should be dismissed .

42 . Section 57.105 , Florida Statutes, provides:

(1) Upon the court's initiative or motion

of any party, t he court shall award a

reasonable attorney's fee to be paid to the

prevailing party in equal amounts by the

losing party and the op posing party's

attorney on any claim or defense at any time

during a civil proceeding or action in which

the court finds that the losing party or the

losing party's attorney knew or should have

known that a claim or defense when initially

presented to the court or at any time before

the trial:

(a) Was not supported by the material facts

necessary to establish the claim or defe nse;

or

(b) Would not be supported by the

application of then - existing law to those

material facts.

* * *

(3) At any time in any civil proceeding or

action in which the moving party proves by a

preponderance of the evidence that any

action taken by th e opposing party,

including, but not limited to, the filing of

any pleading or part thereof, the assertion

of or response to any discovery demand, the

assertion of any claim or defense, or the

response to any request by any other party,

was taken primarily for the purpose of

unreasonable delay, the court shall award

damages to the moving party for its

reasonable expenses incurred in obtaining

the order, which may include attorney's

fees, and other loss resulting from the

improper delay.

(4) A motion by a party seeking sanctions

under this section must be served but may

not be filed with or presented to the court

unless, within 21 days after service of the

motion, the challenged paper, claim,

defense, contention, allegation, or denial

is not withdrawn or appropriately corrected.

(5) In administrative proceedings under

Chapter 120, an administrative law judge

shall award a reasonable attorney's fee and

damages to be paid to the prevailing party

in equal amounts by the losing party and a

losing party's at torney or qualified

representative in the same manner and upon

the same basis as provided in subsections

(1) - (4).

43 . "Attorney's Fees are awarded under Section 57.105 . .

. where there is a total or absolute lack of justiciable issues

of either law or fact, this being tantamount to a finding that

the action is frivolous or completely untenable." Weatherby

Assocs., Inc., v. Ballack , 783 So. 2d 1138, 1141 (Fla. 4th DCA

2001) (citing Muckenfuss v. Deltona Corp. , 508 So. 2d 340, 341

(Fla. 1987) ; Broad & Cassel v. Newport Motel, Inc. , 636 So. 2d

590 (Fla. 3rd DCA 1994) (citing Whitten v. Progressive Cas. Ins.

Co. , 410 So. 2d 501, 502 (Fla. 1982)).

44 . T he Florida Supreme Court recently explained in Forum

v. Boca Burger, Inc. , ____ So. 2d ____, 30 Fl a. L. Weekly S539,

2005 WL 1574959, p. 8 (Fla. 2005), the 1999 revision changed the

standards governing fee awards under Section 57.105 , Florida

Statutes . Unlike the prior version, the current version of the

statute does not apply only to an entire action , but now applies

to any claims or defense. Moreover, an award of fees is not

limited to situations in which there is a complete absence of

justiciable issue of law or fact. Instead, under the revised

standard, fees will be awarded if the party or its co unsel knew

or should have known the claim or defense asserted was not

supported by the facts or an application of then - existing law.

See also Read v. Taylor , 832 So. 2d 219 ( Fla. 4th DCA 2002).

45 . In this case , National States' claim of non - rule pol icy

cannot be said to be without merit. There were assertions, but

no evidence that the claim was totally frivolous or without

merit. The claim was clearly not a significant part of this

action . However, pending development of evidence, such

allegations w ere a legitimate issue to be raised. Therefore,

a ttorneys' fees and costs are not appropriate.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED:

That a rate increase of 38 percent be approved for National

States and that the allegations regarding non - rule policy be

dismissed.

DONE A ND ENTERED this 7 th day of July , 2006, in

Tallahassee, Leon County, Florida.

S

DIANE CLEAVINGER

Administrative Law Judge

Division of Administr ative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 7 th day of July , 2006.

COPIES FURNISHED :

James H. Harris, Esquire

Office of Insurance Regulation

200 East Gaines Street

612 Larson Building, Room 645A - 5

Tallahassee, Florida 32399

Cynthia S. Tunnicliff, Esquire

Pennington, Moore, Wilkinson,

Bell and Dunbar, P.A.

2 15 South Monroe Street, Second Floor

Tallahassee, Florida 32302 - 2095

Kevin M. McCarty, Commissioner

Office of Insurance Regulation

Financial Services Commission

200 East Gaines Street

Tallahassee, Florida 32399 - 0305

Steve Parton, General Counsel

Off ice of Insurance Regulation

Financial Services Commission

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 Recommen ded Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the final order in this case.