07-005186 Hartford Insurance Company Of The Midwest vs. Office Of Insurance Regulation Status: Closed Recommended Order on Friday, March 28, 2008.

Summary: Petitioners` proposed rates in the four filings are excessive in that the underwriting profit is too high; the actual investment practices and income tax figures were not used; and the cost of private and FCHF reinsurance premiums were too high.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HARTFORD FIRE INSURANCE )

COMPANY, HARTFORD INSURANCE )

OF THE SOUTHEAST, HARTFORD CASUALTY INSURANCE COMPANY, )

TWIN CITY FIRE INSURANCE )

COMPANY, HARTFORD UNDERWRITERS )

INSURANCE COMPANY, AND HARTFORD )

ACCIDENT AND INDEMNITY COMPANY, )

)

)

Petitioners, )

)

vs. ) Case Nos. 07-5185

) 07-5186

OFFICE OF INSURANCE REGULATION, ) 07-5187

) 07-5188

Respondent. )

)

RECOMMENDED ORDER

On January 22-24, 2008, a hearing was held in Tallahassee,

Florida, pursuant to the authority set forth in Sections 120.569

and 120.57(1), Florida Statutes. The case was considered by Lisa

Shearer Nelson, Administrative Law Judge.

APPEARANCES

For Petitioner: David A. Yon, Esquire

Donna E. Blanton, Esquire

Radey, Thomas, Yon & Clark, P.A.

301 South Bronough Street, Suite 200

Tallahassee, Florida 32301

For Respondent: Lori Ridner, Esquire

Marc Herskovitz, Esquire

Elenita Gomez, Esquire

Department of Financial Services

Office of Insurance Regulation

200 East Gaines Street

612 Larson Building

Tallahassee, Florida 32399

STATEMENT OF THE ISSUES

Whether Petitioners' proposed rates are justified pursuant

to the requirements of Section 627.062, Florida Statutes, or

whether the Department of Financial Services, Office of Insurance

Regulation (OIR) was correct in denying the requested rate

increases.

PRELIMINARY STATEMENT

These cases arose on September 10, 2007, when the OIR sent

Notices of Intent to Disapprove four filings for rate increases

Petitioners (collectively referred to as Hartford) had filed for

approval. On November 9, 2007, Amended Petitions for

Administrative Hearing Involving Disputed Issues of Material Fact

were filed in each case, and the OIR forwarded the Amended

Petitions to the Division of Administrative Hearings for

assignment of an administrative law judge. All four cases were

assigned to the undersigned.

On November 20, 2007, the parties filed Joint Motions to

Consolidate, which were granted and the cases were consolidated

by an order issued the next day. By agreement of the parties,

the case was noticed for hearing January 22-24, 2008.

The cases proceeded to hearing as scheduled. The first

morning of the hearing, Hartford filed an Unopposed Motion for

Protective Order requesting that those matters contained in the

insurance rate filings (Joint Exhibits numbered 2 through 5) that

are designated as trade secrets be protected from dissemination

and remain sealed. The Unopposed Motion for Protective Order was

granted and those documents in Joint Exhibits numbered 2 through

5 that were sealed and marked as trade secrets have been reviewed

as necessary and returned to the sealed envelopes. Those

documents maintain their trade secret designation and will be

returned to the OIR at the submission of this Recommended Order

as sealed documents.

At hearing, Hartford presented the testimony of 6 witnesses

and Hartford's Exhibits numbered 1 through 48 were admitted into

evidence. Respondent presented the testimony of one witness and

Respondent's Exhibits numbered 1 through 4 were also admitted.

The parties stipulated to the admission of Joint Exhibits

numbered 1 through 18.

The parties filed a Joint Prehearing Statement in which they

stipulated to certain facts related to the filings. Those facts

have been incorporated into the findings of fact below. At the

conclusion of the hearing, the OIR requested additional time for

the preparation of its proposed recommended order. The parties

were given until February 18, 2008, to file their proposed

recommended orders. The transcript was filed with the Division

February 1, 2008. Due to a change in counsel, the Department

requested until March 10, 2008 for the filing of the proposed

recommended orders, and an extension was granted until March 3,

2008. Proposed Recommended Orders from both sides were timely

filed. Both have been carefully considered in the preparation of

this Recommended Order.

FINDINGS OF FACT

1. The Hartford companies are property and casualty

insurers transacting insurance in the State of Florida pursuant

to valid certificates of authority and the Florida Insurance

Code. Two types of personal lines insurance filings submitted by

Hartford to the OIR are at issue in this proceeding: two filings

for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two

filings for dwelling fire insurance (Case Nos. 07-5187 and 07-

5188). Hartford's substantial interests are affected by the

notices disapproving the filings in this case.

2. Homeowners insurance includes coverage for a variety of

perils in and around a home, is usually purchased by a homeowner,

and covers both the structure and the contents of a home.

Dwelling/fire insurance is usually purchased by the owners of

properties that are leased or rented to others, and provides

coverage for the structure only. Both types of insurance cover

damage caused by hurricanes.

The New Legislation and its Requirements

3. In a special session held in January 2007, the Florida

Legislature enacted changes to the Florida Hurricane Catastrophe

Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida.

4. The special session was precipitated by a perceived

crisis regarding the cost and availability of homeowners

insurance after the 2004 and 2005 hurricane seasons. As a result

of the substantial number of claims incurred after multiple

severe hurricanes each of these years, changes in the insurance

marketplace resulted in some insurance companies withdrawing from

the Florida market, others non-renewing policies, one company

becoming insolvent, and the cost for reinsurance available to all

insurers rising dramatically.

5. One of the primary features of the legislation was an

expansion of the CAT Fund. The CAT Fund was established in 1993

after Hurricane Andrew to provide reinsurance to insurers for

property insurance written in Florida at a price significantly

less than the private market. The CAT Fund is a non-profit

entity and is tax exempt.

6. Prior to the enactment of Chapter 2007-1, the CAT Fund

had an industry-wide capacity of approximately $16 million. The

purpose of the changes enacted by the Legislature was to reduce

the cost of reinsurance and thereby reduce the cost of property

insurance in the state. As a result of Chapter 2007-1, the

industry-wide capacity of the CAT Fund was increased to $28

billion, and insurers were given an opportunity to purchase an

additional layer of reinsurance, referred to as the TICL layer

(temporary increase in coverage limit), from the CAT Fund.

7. Section 3 of Chapter 2007-1 required insurers to submit

a filing to the OIR for policies written after June 1, 2007, that

took into account a "presumed factor" calculated by OIR and that

purported to reflect savings created by the law. The new law

delegated to the OIR the duty to specify by Order the date such

filings, referred to as "presumed factor filings" had to be made.

8. On February 19, 2007, the OIR issued Order No. 89321-07.

The Order required insurers to make a filing by March 15, 2007,

which either adopted presumed factors published by the OIR or

used the presumed factors and reflected a rate decrease taking

the presumed factors into account. The presumed factors were the

amounts the OIR calculated as the average savings created by

Chapter 2007-1, and insurers were required to reduce their rates

by an amount equal to the impact of the presumed factors.

9. The OIR published the presumed factors on March 1, 2007.

In its March 15, 2007, filings, Hartford adopted the presumed

factors published by OIR. As a result, Hartford reduced its

rates, effective June 1, 2007, on the products at issue in these

filings by the following percentages:

Case No. 07-5185 homeowners product: 17.7%

Case No. 07-5186 homeowners product: 21.9%

Case No. 07-5187 dwelling/fire product: 8.7%

Case No. 07-5188 dwelling/fire product: 6.2%

10. The Order also required that insurers submit a "True-Up

Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes.

The filing was to be a complete rate filing that included the

company's actual reinsurance costs and programs. Hartford's

filings at issue in these proceedings are its True-Up Filings.

The True-Up Filings

11. Hartford submitted its True-Up filings June 15, 2007.

The rate filings were certified as required by Section

627.062(9), Florida Statutes. The filings were amended August 8,

2007.

12. Hartford's True Up Filings, as amended, request the

following increases in rates over those reflected in the

March 15, 2007, presumed factor filings:

Case No. 07-5185 homeowners product: 22.0%

Case No. 07-5186 homeowners product: 31.6%

Case No. 07-5187 dwelling and fire product: 69.0%

Case No. 07-5188 dwelling and fire product: 35.9%

13. The net effects of Hartford's proposed rate filings

result in the following increases over the rates in place before

the Presumed Factor Filings:

Case No. 07-5185 homeowners product: .4%

Case No. 07-5186 homeowners product: 2.8%

Case No. 07-5187 dwelling/fire product: 54.3%

Case No. 07-5188 dwelling/fire product: 27.5%

14. Case Nos. 07-5185 and 07-5186 (homeowners) affect

approximately 92,000 insurance policies. Case Nos. 07-5187 and

07-5188 (dwelling/fire) affect approximately 2,550 policies.

15. A public hearing was conducted on the filings

August 16, 2007. Representatives from Hartford were not notified

prior to the public hearing what concerns the OIR might have with

the filings. Following the hearing, on August 20, 2007,

Petitioners provided by letter and supporting documentation

additional information related to the filings in an effort to

address questions raised at the public hearing.

16. The OIR did not issue clarification letters to Hartford

concerning any of the information provided or any deficiencies in

the filings before issuing its Notices of Intent to Disapprove

the True-Up Filings.

17. All four filings were reviewed on behalf of the OIR by

Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings

and did not review any previous filings submitted by Hartford

with respect to the four product lines.

18. On September 10, 2007, the OIR issued Notices of Intent

to Disapprove each of the filings at issue in this case. The

reasons give for disapproving the two homeowners filings are

identical and are as follows:

Having reviewed the information submitted,

the Office finds that this filing does not

provide sufficient documentation or

justification to demonstrate that the

proposed rate(s) comply with the standards of

the appropriate statute(s) and rules(s)

including demonstrating that the proposed

rates are not excessive, inadequate, or

unfairly discriminatory. The deficiencies

include but are not limited to:

1. The premium trends are too low and are

not reflective of the historical pattern of

premium trends.

2. The loss trends are too high and are not

reflective of the historical pattern of loss

trends.

3. The loss trends are based on an

unexplained and undocumented method using

"modeled" frequency and severity as opposed

to actual frequency and severity.

4. The loss trends are excessive and

inconsistent compared to other sources of

loss trends such as Fast Track data.

5. The catastrophe hurricane losses, ALAE

and ULAE amounts are excessive and not

supported.

6. The catastrophe non-hurricane losses,

ALAE and ULAE amounts are excessive and not

supported. The particular time period from

1992 to 2006 used to calculate these values

has not been justified. There has been no

explanation of why the extraordinarily high

reported losses for 1992 and 1993 should be

expected to occur in the future.

7. The underwriting profit and contingency

factors are excessive and not supported.

8. Various components underlying the

calculation of the underwriting profit and

contingency factors, including but not

limited to the return on surplus, premium to

surplus ratio, investment income and tax rate

are not supported or justified.

9. The underwriting expenses and other

expenses are excessive and not supported.

10. The non-FHCF reinsurance costs are

excessive and not supported.

11. The FHCF reinsurance costs are excessive

and not supported.

12. The fact that no new business is being

written has not been taken into account.

13. No explanation has been provided as too

[sic] Hartford believes it is reasonable to

return such a low percentage of premium in

the form of loss payments to policyholders.

For example, for the building policy forms,

only about 40% of the premium requested by

Hartford is expected to be returned to

policyholders in the form of loss payments.

As a result of the deficiencies set forth

above, the Office finds that the proposed

rate(s) are not justified, and must be deemed

excessive and therefore, the Office intends

to disapprove the above-referenced filing.

19. The Notices of Intent to Disapprove the two

dwelling/fire filings each list nine deficiencies. Seven of the

nine (numbers 1-6 and 8) are the same as deficiencies listed for

the homeowners filings. The remaining deficiencies named for

Case No. 07-5187 are as follows:

7. The credibility standard and credibility

value are not supported.

9. No explanation has been provided as too

(sic) why Hartford believes it needs such a

large rate increase currently, when the

cumulative rate change implemented by

Hartford for this program from 2001 to 2006

was an increase of only about 10%.

20. The deficiencies listed for Case No. 07-5188 are the

same as those listed for Case No. 07-5187, with the exception

that with respect to deficiency number 9, the rate change

implemented for the program in Case No. 07-5188 from 2001 to 2006

was a decrease of about -3%.

Documentation Required for the Filings

21. Florida's regulatory framework, consistent with most

states, requires that insurance rates not be inadequate,

excessive, or unfairly discriminatory. In making a determination

concerning whether a proposed rate complies with this standard,

the OIR is charged with considering certain enumerated factors in

accordance with generally accepted and reasonable actuarial

techniques.

22. Chapter 2007-1 also amended Section 627.062, Florida

Statutes, to add a certification requirement. The amendment

requires the chief executive officer or chief financial officer

and chief actuary of a property insurer to certify under oath

that they have reviewed the rate filing; that to their knowledge,

the rate filing does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make

the statements made, in light of the circumstances under which

the statements were made, not misleading; that based on their

knowledge, the information in the filing fairly presents the

basis of the rate filing for the period presented; and that the

rate filing reflects all premium savings reasonably expected to

result from legislative enactments and are in accordance with

generally accepted and reasonable actuarial techniques.

§ 627.062(9)(a), Fla. Stat. (2007).

23. Actuarial Standards of Practice 9 and 41 govern

documentation by an actuary. Relevant sections of Standard of

Practice 9 provide:

5.2 Extent of documentation - . . .

Appropriate records, worksheets, and other

documentation of the actuary's work should be

maintained by the actuary and retained for a

reasonable length of time. Documentation

should be sufficient for another actuary

practicing in the same field to evaluate the

work. The documentation should describe

clearly the sources of data, material

assumptions, and methods. Any material

changes in sources of data, assumptions, or

methods from the last analysis should be

documented. The actuary should explain the

reason(s) for and describe the impact of the

changes.

5.3 Prevention of misuse - . . . The actuary

should take reasonable steps to ensure that

an actuarial work product is presented

fairly, that the presentation as a whole is

clear in its actuarial aspects, and that the

actuary is identified as the source of the

actuarial aspects, and that the actuary is

available to answer questions.. . . .

* * *

5.5 Availability of documentation-

Documentation should be available to the

actuary's client or employer, and it should

be made available to other persons when the

client or employer so requests, assuming

appropriate compensation, and provided such

availability is not otherwise improper. . . .

24. In determining the appropriate level of documentation

for the proposed rate filings, Petitioner relied on its

communications with OIR, as well as its understanding of what has

been required in the past. This reliance is reasonable and is

consistent with both the statutory and rule provisions governing

the filings.

Use of the RMS Catastrophic Loss Projection Model

25. In order to estimate future losses in a rate filing, an

insurer must estimate catastrophic and non-catastrophic losses.

Hartford's projected catastrophic losses in the filings are based

upon information provided from the Risk Management Solutions

(RMS) catastrophic loss projection model, version 5.1a.

Hartford's actuaries rely on this model, consistent with the

standards governing actuarial practice, and their reliance is

reasonable.

26. Catastrophe loss projection models may be used in the

preparation of insurance filings, if they have been considered by

and accepted by the Florida Commission on Hurricane Loss

Projection Methodology (the Hurricane Commission). The Hurricane

Commission determined that the RMS model, version 5.1a was

acceptable for projecting hurricane loss costs for personal

residential rate filings on May 17, 2006.

27. In addition to approval by the Hurricane Commission,

use of the model is appropriate "only if the office and the

consumer advocate appointed pursuant to s. 627.0613 have access

to all of the assumptions and factors that were used in

developing the actuarial methods, principles, standards, models,

or output ranges, and are not precluded from disclosing such

information in a rate proceeding." §627.0628(3)(c), Fla. Stat.

28. Both the Consumer Advocate and a staff person from the

OIR are members of the Hurricane Commission. In that context,

both have the ability to make on-site visits to the modeling

companies, and to ask any questions they choose regarding the

models. Both OIR's representative and the Consumer Advocate

participated in the meetings and had the same opportunity as

other commissioners to ask any question they wished about RMS

5.1a. The Hurricane Commission members, including the Consumer

Advocate, clearly have access to the information identified in

Section 627.0628(3)(c).

29. However, there are restrictions on the Hurricane

Commission members' ability to share the information received

regarding trade secrets disclosed by the modeling companies. For

that reason, the Commission's deliberations are not, standing

alone, sufficient to determine that the Office of Insurance

Regulation has access.

30. In this case, credible evidence was submitted to show

that RMS officials met with staff from the Office in July and

October 2006 to discuss the model. RMS offered to provide any of

its trade secret information to the OIR, subject to a non-

disclosure agreement to protect its dissemination to competitors.

RMS also opened an office in Tallahassee and invited OIR staff to

examine any parts of the model they wished. In addition, both

RMS and Hartford have answered extensive questionnaires prepared

by OIR regarding the RMS model, and Hartford has offered to

assist OIR in gathering any additional information it requires.

Most of the questions posed by OIR involve the same areas

reviewed by the Commission. RMS' representative also testified

at hearing that RMS would not object to disclosure of the

assumptions during the hearing itself if necessary.

31. Finally, OIR Exhibit 1 is the Florida Hurricane

Catastrophe Fund 2007 Ratemaking Formula Report. The Executive

Summary from the report explains how rates were recommended for

the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007-

2008 contract year. The report stated that the RMS model, as

well as three other models accepted by the Hurricane Commission,

were used for determining expected aggregate losses to the CAT

Fund reinsurance layer. Three models, including the RMS model,

were also used for analysis of detailed allocation to type of

business, territory, construction and deductible, as well as

special coverage questions. The models were compared in detail

and given equal weight. The report notes that these three models

were also used in 1999-2006 ratemaking.

32. The report is prepared by Paragon Strategic Solutions,

Inc., an independent consultant selected by the State Board of

Administration, in accordance with Section 215.555(5), Florida

Statutes. While OIR did not prepare the report, they show no

hesitation in accepting and relying on the report and the modeled

information it contains in these proceedings. Indeed, one of

OIR's criticisms is Hartford's failure to use the report with

respect to CAT Fund loss recovery estimates.

33. Based upon the evidence presented at hearing, it is

found that the OIR and Consumer Advocate were provided access to

the factors and assumptions used in the RMS model, as

contemplated by Section 627.0628.

The Alleged Deficiencies in the Homeowners Filings 1/

34. A rate is an estimate of the expected value of future

costs. It provides for all costs associated with the transfer of

risk. A rate is reasonable and not excessive, inadequate or

unfairly discriminatory if it is an actuarially sound estimate of

the expected value of all future costs associated with an

individual risk transfer.

35. In preparing a filing, an actuary identifies the time

period that its proposed rates are expected to be in effect.

Because ratemaking is prospective, it involves determining the

financial value of future contingent events.

36. For the rate filings in question, actuaries for

Hartford developed their rate indications by first considering

trended premium, which reflects changes in premium revenue based

on a variety of factors, including construction costs and the

value of the buildings insuredended premium is the best

estimate of the premium revenue that will be collected if the

current rates remain in effect for the time period the filing is

expected to be in place.

37. Expenses associated with writing and servicing the

business, the reinsurance costs to support the business and an

allowance for profit are subtracted from the trended premium.

The remainder is what would be available to pay losses. This

approach to ratemaking, which is used by Hartford, is a standard

actuarial approach to present the information for a rate

indication.

38. As part of the process, expected claims and the cost to

service and settle those claims is also projected. These

calculations show the amount of money that would be available to

pay claims if no changes are made in the rates and how much

increased premium is necessary to cover claims. The additional

amount of premium reflects not only claims payments but also

taxes, licenses and fees that are tied to the amount of premium.

39. The first deficiency identified by OIR is that "the

premium trends are too low and are not reflective of the

historical pattern of premium trends." In determining the

premium trend in each filing, Hartford used data from the

previous five years and fit an exponential trend to the

historical pattern, which is a standard actuarial technique.

40. Hartford also looked at the factors affecting the more

recent years, which were higher. For example, the peak in

premium trend in 2006 was a result of the cost increases driven

by the 2004 and 2005 hurricanes, and the peak in demand for labor

and construction supplies not matched by supply. Costs were

coming down going into 2007, and Hartford believed that 2006 was

out of pattern from what they could anticipate seeing in the

future.

41. The premium trends reflected in Hartford's filings are

reasonable, reflective of historical patterns, and based on

standard actuarial techniques.

42. The second identified deficiency with respect to the

homeowner filings was that the loss trends are too high and are

not reflective of the historical pattern of loss trends.

43. A loss trend reflects the amount an insurance company

expects the cost of claims to change. It consists of a frequency

trend, which is the number of claims the insurance company

expects to receive, and a severity trend, which is the average

cost per claim. The loss trend compares historical data used in

the filing with the future time period when the new rates are

expected to be in effect. Hartford's loss trends were estimated

using a generalized linear model, projecting frequency and

severity separately. The model was based on 20 quarters of

historical information. The more credible testimony presented

indicates that the loss trends were actuarially appropriate.

44. The third identified deficiency is that the loss trends

are based on an unexplained and undocumented method using

"modeled" frequency and severity as opposed to actual frequency

and severity. As noted above, the generalized linear model uses

actual, historical data. Sufficient documentation was provided

in the filing, coupled with Hartford's August 20, 2007, letter.

The method used to determine loss trends is reasonable and is

consistent with standard actuarial practice.

45. The fourth identified deficiency is that loss trends

are excessive and inconsistent compared to other sources of loss

trends, such as Fast Track data. Saying that the loss trends are

excessive is a reiteration of the claim that they are too high,

already addressed with respect to deficiency number two.

46. Fast Track data is data provided by the Insurance

Services Office. It uses unaudited information and is prepared

on a "quick turnaround" basis. Fast Track data is based on paid

claims rather than incurred claims data, and upon a broad number

of companies with different claims settlement practices. Because

it relies on paid claims, there is a time lag in the information

provided. Hartford did not rely on Fast Track data, but instead

relied upon its own data for calculating loss trends. Given the

volume of business involved, Hartford had enough data to rely on

for projecting future losses. Moreover, Respondents point to no

statutory or rule requirement to use Fast Track data. The

filings are not deficient on this basis.

47. The fifth identified deficiency in the Notice of Intent

to Disapprove is that catastrophe hurricane losses, ALAE and ULAE

amounts are excessive and not supported. ALAE stands for

"allocated loss adjustment expenses," and represents the costs

the company incurs to settle a claim and that can be attributed

to that particular claim, such as legal bills, court costs,

experts and engineering reports. By contrast, ULAE stands for

"unallocated loss adjustment expense" and represents the

remainder of claims settlement costs that cannot be linked to a

specific claim, such as office space, salaries and general

overhead.

48. Part of the OIR's objection with respect to this

deficiency relates to the use of the RMS model. As stated above

at paragraphs 25-33, the use of the RMS model is reasonable.

49. With respect to ALAE, Hartford analyzed both nationwide

data (4.4%) and Florida data (4.8%) and selected an ALAE load

between the two (4.6%). This choice benefits Florida

policyholders. It is reasonable to select between the national

and Florida historical figures, given the amount of actual

hurricane data available during the period used. With respect to

ULAE, the factors used were based upon directions received from

Ken Ritzenthaler, an actuary with OIR, in a previous filing. The

prior discussions with Mr. Ritzenthaler are referenced in the

exhibits to the filing. The more credible evidence demonstrates

that the ALAE and ULAE expenses with respect to catastrophic

hurricane losses are sufficiently documented in Hartford's

filings and are based on reasonable actuarial judgment.

50. The sixth identified deficiency is that the catastrophe

non-hurricane losses, ALAE and ULAE amounts are excessive and not

supported. According to OIR, the particular time period from

1992 to 2006 used to calculate these values has not been

justified, and there has been no explanation of why the

extraordinarily high reported losses for 1992 and 1993 should be

expected to occur in the future.

51. OIR's complaint with respect to non-hurricane losses is

based upon the number of years of data included. While the RMS

model was used for hurricane losses, there is no model for non-

hurricane losses, so Hartford used its historical data. This

becomes important because in both 1992 and 1993, there were

unusual storms that caused significant losses.

52. Hartford's data begins with 1992 and goes through 2006,

which means approximately fifteen years worth of data is used.

Hartford's explanation for choosing that time period is that

hurricane models were first used in 1992, and it was at that time

that non-hurricane losses had to be separated from hurricane

losses. Thus, it was the first year that Hartford had the data

in the right form and sufficient detail to use in a rate filing.

Petitioners have submitted rate filings in the past that begin

non-hurricane, ALAE and ULAE losses with 1992, increasing the

number of years included in the data with each filing. Prior

filings using this data have been approved by OIR.

53. It is preferable to use thirty years of experience for

this calculation. However, there was no testimony that such a

time-frame is actuarially or statutorily required, and OIR's

suggestion that these two high-loss years should be ignored is

not based upon any identified actuarial standard. Hartford

attempted to mitigate the effect of the severe losses in 1992 and

1993 by capping the losses for those years, as opposed to relying

on the actual losses. 2/ The methodology used by Hartford was

reasonable and appropriate. No other basis was identified by the

OIR to support this stated deficiency.

54. The seventh identified deficiency is that the

underwriting profit and contingency factors are excessive and not

supported.

55. The underwriting profit factor is the amount of income,

expressed as a percentage of premium, that an insurance company

needs from premium in excess of losses, settlement costs and

other expenses in order to generate a fair rate of return on its

capital necessary to support its Florida exposures for the

applicable line of business. Hartford's proposed underwriting

profit factor for its largest homeowners filing is 15.3%.

56. Section 627.062(2)(b), Florida Statutes, contemplates

the allowance of a reasonable rate of return, commensurate with

the risk to which the insurance company exposes its capital and

surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes

the adoption of rules to specify the manner in which insurers

shall calculate investment income attributable to classes of

insurance written in Florida, and the manner in which investment

income shall be used in the calculation of insurance rates. The

subsection specifically indicates that the manner in which

investment income shall be used in the calculation of insurance

rates shall contemplate allowances for an underwriting profit

factor.

57. Florida Administrative Code Rule 69O-170.003 is

entitled "Calculation of Investment Income," and the stated

purpose of this rule is as follows:

(1) The purpose of this rule is to specify

the manner in which insurers shall calculate

investment income attributable to insurance

policies in Florida and the manner in which

such investment income is used in the

calculation of insurance rates by the

development of an underwriting profit and

contingency factor compatible with a

reasonable rate of return. (Emphasis

supplied).

58. Mr. Schwartz relied on the contents of this rule in

determining that the underwriting profit factor in Hartford's

filings was too high, in that Florida Administrative Code Rule

69O-170.003(6)(a) and (7) specifies that:

(6)(a) . . . An underwriting profit and

contingency factor greater than the quantity

5% is prima facie evidence of an excessive

expected rate of return and unacceptable,

unless supporting evidence is presented

demonstrating that an underwriting profit and

contingency factor included in the filing

that is greater than this quantity is

necessary for the insurer to earn a

reasonable rate of return. In such case, the

criteria presented as determined by criteria

in subsection (7) shall be used by the Office

of Insurance Regulation in evaluating this

supporting evidence.

* * *

(7) An underwriting profit and contingency

factor calculated in accordance with this

rule is considered to be compatible with a

reasonable expected rate of return on net

worth. If a determination must be made as to

whether an expected rate of return is

reasonable, the following criteria shall be

used in that determination.

(a) An expected rate of return for Florida

business is to be considered reasonable if,

when sustained by the insurer for its

business during the period for which the

rates under scrutiny are in effect, it

neither threatens the insurer's solvency nor

makes the insurer more attractive to

policyholders or investors from a corporate

financial perspective than the same insurer

would be had this rule not been implemented,

all other variables being equal; or

(b) Alternatively, the expected rate of

return for Florida business is to be

considered reasonable if it is commensurate

with the rate of return anticipated for other

industries having corresponding risk and it

is sufficient to assure confidence in the

financial integrity of the insurer so as to

maintain its credit and, if a stock insurer,

to attract capital, or if a mutual or

reciprocal insurer, to accumulate surplus

reasonably necessary to support growth in

Florida premium volume reasonably expected

during the time the rates under scrutiny are

in effect.

59. Mr. Schwartz also testified that the last published

underwriting profit and contingency factor published by OIR was

3.7%, well below what is identified in Hartford's filings.

60. Hartford counters that reliance on the rule is a

misapplication of the rule (with no explanation why), is

inconsistent with OIR's treatment of the profit factors in their

previous filings, and ignores the language of Section

627.062(2)(b)11., Florida Statutes.

61. No evidence was presented to show whether the expected

rate of return threatens Hartford's solvency or makes them more

attractive to policyholders or investors from a corporate

financial perspective than they would have been if Rule 69O-

170.003 was not implemented. Likewise, it was not demonstrated

that the expected rate of return for Florida business is

commensurate with the rate of return for other industries having

corresponding risk and is necessary to assure confidence in the

financial integrity of the insurer in order to maintain its

credit and to attract capital.

62. While the position taken by OIR with respect to

Hartford's filings may be inconsistent with the position taken

in past filings, that cannot be determined on this record. The

prior filings, and the communications Hartford had with OIR with

regard to those filings, are not included in the exhibits in this

case. There is no way to determine whether Petitioners chose to

present evidence in the context of prior filings consistent with

the criteria in Rule 69O-170.003, or whether OIR approved the

underwriting profit and contingency factor despite Rule 69O-

170.003.

63. Having an underwriting profit factor that is considered

excessive will result in a higher rate indication. Therefore, it

is found that the seventh identified deficiency in the Notices of

Intent to Disapprove for the homeowners filings and the second

identified deficiency in the Notices of Intent to Disapprove for

the dwelling/fire filings is sustained.

64. The eighth identified deficiency is that various

components underlying the calculation of the underwriting profit

and contingency factors, including but not limited to the return

on surplus, premium to surplus ratio, investment income and tax

rate are not supported or justified.

65. Return on surplus is the total net income that would

result from the underwriting income and the investment income

contributions relative to the amount of capital that is exposed.

Surplus is necessary in addition to income expected from premium,

to insure that claims will be paid should losses in a particular

year exceed premium and income earned on premium. Hartford's

expected return on surplus in these filings is 15%.

66. The return on surplus is clearly tied to the

underwriting profit factor, although the percentages are not

necessarily the same. It follows, however, that if the

underwriting income and contingency factor is excessive, then the

return on surplus may also be too high. Hartford has not

demonstrated that the return on surplus can stand, independent of

a finding that the underwriting profit and contingency factor is

excessive.

67. Premium-to-surplus ratio is a measure of the number of

dollars of premium Hartford writes relative to the amount of

surplus that is supporting that exposure. Hartford's premium-to-

surplus ratio in the AARP homeowners filing is 1.08, which means

that if Hartford wrote $108 of premium, it would allocate $100 of

surplus to support that premium. 3/ The premium-to-surplus ratio

is reasonable, given the amount of risk associated with

homeowners insurance in Florida.

68. The OIR's position regarding investment income and tax

rates are related. The criticism is that the filing used a low-

risk investment rate based on a LIBOR (London Interbank Offering

Rate), which is a standard in the investment community for risk-

free or low-risk yield calculations. The filing also used a full

35% income tax rate applied to the yield.

69. Evidence was presented to show that, if the actual

portfolio numbers and corresponding lower tax rate were used in

the filings, the rate after taxes would be the same.

70. The problem, however, is that Section 627.062(2)(b)4.,

Florida Statutes, requires the OIR to consider investment income

reasonably expected by the insurer, "consistent with the

insurer's investment practices," which assumes actual practices.

While the evidence at hearing regarding Hartford's investments

using its actual portfolio yield may result in a similar bottom

line, the assumptions used in the filing are not based on

Petitioner's actual investment practices. As a result, the tax

rate identified in the filing is also not the actual tax rate

that has been paid by Hartford. The greater weight of the

evidence indicates the data used is not consistent with the

requirements of Section 627.062(2)(b)4., Florida Statutes.

Therefore, the eighth deficiency is sustained to the extent that

the filing does not adequately support the return on surplus,

investment income and tax rate.

71. The ninth identified deficiency is that the

underwriting expenses and other expenses are excessive and not

supported. Hartford used the most recent three years of actual

expense data, analyzed them and made expense selections based on

actuarial judgment. The use of the three-year time frame was

both reasonable and consistent with common ratemaking practices.

Likewise, the commission rates reflected in the agency filings

are also reasonable.

72. The tenth identified deficiency is that the non-FHCF

(or private) reinsurance costs are excessive and not supported.

The criticism regarding private reinsurance purchases is three-

fold: 1) that Hartford paid too much for their reinsurance

coverage; 2) that Hartford purchases their reinsurance coverage

on a nationwide basis as opposed to purchasing coverage for

Florida only; and 3) that the percentage of the reinsurance

coverage allocated to Florida is too high.

73. Hartford buys private reinsurance in order to write

business in areas that are exposed to catastrophes. It buys

reinsurance from approximately 40 different reinsurers in a

competitive, arm's-length process and does not buy reinsurance

from corporate affiliates. Hartford used the "net cost" of

insurance in its filings, an approach that is appropriate and

consistent with standard actuarial practices. Hartford also used

the RMS model to estimate the expected reinsurance recoveries,

which are subtracted from the premium costs.

74. Hartford buys private catastrophic reinsurance on a

nationwide basis to protect against losses from hurricanes,

earthquakes and terrorism, and allocates a portion of those costs

to Florida. Testimony was presented, and is accepted as

credible, that attempting to purchase reinsurance from private

vendors for Florida alone would not be cost-effective. The cost

of reinsurance, excluding a layer of reinsurance that covers only

the Northeast region of the country and is not reflected in

calculating costs for Florida, is approximately $113 million.

75. Hartford retains the first $250 million in catastrophe

risk for any single event, which means losses from an event must

exceed that amount before the company recovers from any

reinsurer. In 2006, Hartford raised its retention of losses from

$175 million to $250 million in an effort to reduce the cost of

reinsurance. Hartford purchases reinsurance in "layers," which

cover losses based on the amount of total losses Hartford incurs

in various events.

76. Hartford allocates approximately 65% of the private

reinsurance costs (excluding the Northeast layer) to Florida in

the AARP homeowners filing. Only 6-7% of Hartford's homeowners

policies are written in Florida.

77. The amount Hartford paid for reinsurance from private

vendors is reasonable, given the market climate in which the

insurance was purchased. Hartford has demonstrated that the

process by which the reinsurance was purchased resulted in a

price that was clearly the result of an arms-length transaction

with the aim of securing the best price possible.

78. Likewise, the determination to purchase reinsurance on

a nationwide basis as opposed to a state-by-state program allows

Hartford to purchase reinsurance at a better rate, and is more

cost-effective. Purchasing reinsurance in this manner, and then

allocating an appropriate percentage to Florida, is a reasonable

approach.

79. With respect to the allocation of a percentage of

reinsurance cost to Florida, OIR argues that, given that Florida

represents only 6-7% of Hartford's homeowner insurance business,

allocation of 65% of the reinsurance costs to Florida is per se

unreasonable. However, the more logical approach is to examine

what percentage of the overall catastrophic loss is attributable

to Florida, and allocate reinsurance costs accordingly.

80. After carefully examining both the testimony of all of

the witnesses and the exhibits presented in this case, the

undersigned cannot conclude that the allocation of 65% of the

private reinsurance costs is reasonable, and will not result in

an excessive rate. 4/

81. The eleventh identified deficiency is that the FHCF (or

CAT Fund) reinsurance costs are excessive and not supported.

Hartford purchases both the traditional layer of CAT Fund

coverage, which is addressed in a separate filing and not

reflected in these filings, and the TICL layer made available

pursuant to Chapter 2007-1, Laws of Florida.

82. Hartford removed the costs of its previously purchased

private reinsurance that overlapped with the TICL layer and those

costs are not reflected in these filings and have not been passed

on to Florida policyholders.

83. In estimating the amount of premium Hartford would pay

for the TICL coverage, it relied on information provided by

Paragon, a consulting firm that calculates the rates for the CAT

Fund. As noted in finding of fact number 31, the RMS model,

along with three other models accepted by the Hurricane

Commission, were used by Paragon for determining expected

aggregate losses to the CAT Fund reinsurance layer, clearly a

crucial factor in determining the rate for the CAT fund.

Hartford did not use the loss recoveries calculated by Paragon,

but instead estimated the total amount of premium it would pay

for the TICL coverage and subtracted the expected loss recoveries

based on the RMS model alone. The expected loss recoveries under

the RMS model standing alone were 60% of the loss recovery

estimate calculated by Paragon when using all four models.

84. Hartford claimed that its use of the RMS model was

necessary for consistency. However, it pointed to no actuarial

standard that would support its position with respect to this

particular issue. Moreover, given that the premium used as

calculated by Paragon used all four models, it is actually

inconsistent to use one number which was determined based on all

four models (the Paragon-based premium estimate) for one half of

this particular calculation and then subtract another number

using only one model for the other half (the loss recoveries

rate) in order to determine the net premium. To do so fails to

take into account the unique nature of the CAT fund, in terms of

its low expenses and tax-exempt status. Accordingly, it is found

that the CAT-Fund reinsurance costs for the TICL layer are

excessive.

85. The twelfth identified deficiency is that Hartford did

not consider in the filing that no new business is being written.

OIR's explanation of this asserted deficiency is that the costs

associated with writing new business are generally higher than

that associated with writing renewals. Therefore, according to

OIR, failure to make adjustments to their historical experience

to reflect the current mix of business, means that the costs

included in the filing would be excessive.

86. Hartford began restricting the writing of new business

for these filings in 2002. Ultimately, no new business for the

AARP program was written after November 2006 and no new business

was written for the agency program after June 2006. Credible

evidence was presented to demonstrate that a very low percentage

of new business has been written over the period of time used for

demonstrating Hartford's historical losses. As a result, the

effect of no longer writing new business is already reflected in

the data used to determine expenses. No additional adjustment in

the filing was necessary in this regard.

87. The thirteenth identified deficiency is that no

explanation has been provided as to why Hartford believes it is

reasonable to return such a low percentage of premium in the form

of loss payments to policyholders. For example, for the building

policy forms, OIR states that only about 40% of the premium

requested by Hartford is expected to be returned to policyholders

in the form of loss payments.

88. OIR pointed to no actuarial standard that would require

a specific explanation regarding how much of the premium should

be returned to policyholders. Nor was any statutory or rule

reference supplied to support the contention that such an

explanation was required. Finally, the more credible evidence

presented indicates that the correct percentage is 44%. In any

event, this criticism is not a basis for finding a deficiency in

the filing.

Alleged Deficiencies in the Dwelling/Fire Filings

89. The seventh deficiency identified in the dwelling/fire

filings, not reflected in the homeowner filings, is that the

credibility standard and credibility values are not supported.

90. Credibility is the concept of identifying how much

weight to put on a particular set of information relative to

other potential information. Credibility value is determined by

applying the "square root rule" to the credibility value, a

commonly used actuarial approach to credibility.

91. Hartford used the credibility standard of 40,000 earned

house years in these filings. This credibility standard has been

the standard within the industry for personal property filings

for over forty years and has been used in prior filings submitted

to OIR.

92. Mr. Schwartz testified that his criticism with respect

to the credibility standard and credibility values is that

Hartford did not explain why they used that particular standard.

However, Florida Administrative Code Rule 69O-170.0135 discusses

those items that must be included in the Actuarial Memorandum for

a filing. With respect to credibility standards and values, Rule

69O-170.0135(2)(e)5., provides that the basis need only be

explained when the standard has changed from the previous filing.

Given that no change has been made in these filings with respect

to the credibility standard, this criticism is not a valid basis

for issuing a Notice of Intent to Disapprove.

93. The ninth deficiency in the Notice relating to the

dwelling/fire filing in Case No. 07-5187 provides: "No

explanation has been provided as too (sic) why Hartford believes

it needs such a large rate increase currently, when the

cumulative rate change implemented by Hartford for this program

from 2001 to 2006 was an increase of only about 10%." With

respect to Case No. 07-5188, the deficiency is essentially the

same, except the cumulative rate change identified for the same

period of time is a decrease of about -3%.

94. Testimony established that the dwelling/fire rate

increases were larger than those identified for the homeowners

filings because Hartford did not seek rate increases for these

lines for several years. The decision not to seek increases was

not based on the adequacy of current rates. Rather, the decision

was based on an internal determination that, based on the

relatively small number of policies involved in these two

filings, the amount of increased premium reflected in a rate

increase was not sufficient to incur the costs associated with

preparing the filings.

95. Mr. Schwartz pointed to no authority, either in

statute, rule, or Actuarial Standard, that requires the

explanation he desired. He acknowledged that he understood the

basis of how Hartford reached the rate increase they are

requesting. The failure to provide the explanation Mr. Schwartz

was seeking is not a valid basis for a Notice of Intent to

Disapprove.

CONCLUSIONS OF LAW

96. The Division of Administrative Hearings has

jurisdiction over the subject matter and the parties to this

action in accordance with Sections 120.569 and 120.57(1), Florida

Statutes.

97. The Notices of Intent to Disapprove issued by the OIR

represent preliminary agency action. This proceeding is a de

novo proceeding. Boca Raton Artificial Kidney Center, Inc. v.

Florida Department of Health and Rehabilitative Services , 475 So.

2d 260, 262 (Fla. 1st DCA 1985); Florida Department of

Transportation v. J.W.C. Co. , 396 So. 2d 778, 786-87 (Fla. 1st

DCA 1981).

98. The Hartford Companies, as Petitioners in these

proceedings, have the initial burden of going forward with the

evidence and the ultimate burden of persuasion to show by a

preponderance of the evidence that the proposed rates are

not excessive, inadequate or unfairly discriminatory.

§ 627.062(2)(b), (g), Fla. Stat.

99. Although Hartford has the ultimate burden of

persuasion, the burden of going forward with the evidence may and

does shift during the course of the proceeding. J.W.C. , 396 So.

2d at 787; In re Estate of Ziy , 223 So. 2d 42, 43 (Fla.

1969)("Generally speaking, the burden of proof, in the sense of

producing evidence, passes from party to party as the case

progresses, while the burden of proof, meaning the obligation to

establish the truth of the claim by a preponderance of the

evidence, rests throughout upon the party asserting the

affirmative of the issue. . . .").

100. Hartford had the initial burden of going forward to

establish a prima facie case that supports the four filings.

OIR had the burden of presenting evidence that Hartford's filings

were deficient in accordance with the statutorily enumerated

basis and thus would result in rates that were inconsistent with

the statutory mandate. The ultimate burden of persuasion remains

with Hartford. Department of Banking and Finance v. Osborne

Stern and Company , 670 So. 2d 932, 934 (Fla. 1996).

101. The issues in this case are framed by the requirements

of Section 627.062, Florida Statutes, which states in pertinent

part:

(1) The rates for all classes of insurance

to which the provisions of this part are

applicable shall not be excessive,

inadequate, or unfairly discriminatory.

(2) As to all such classes of insurance:

(a) Insurers or rating organizations shall

establish and use rates, rating schedules, or

rating manuals to allow the insurer a

reasonable rate of return on such classes of

insurance written in this state. A copy of

rates, rating schedules, rating manuals,

premium credits or discount schedules, and

surcharge schedules, and changes thereto,

shall be filed with the office under one of

the following procedures except as provided

in subparagraph 3.:

1. If the filing is made at least 90 days

before the proposed effective date and the

filing is not implemented during the office's

review of the filing and any proceeding and

judicial review, then such filing shall be

considered a "file and use" filing. In such

case, the office shall finalize its review by

issuance of a notice of intent to approve or

a notice of intent to disapprove within 90

days after receipt of the filing. The notice

of intent to approve and the notice of intent

to disapprove constitute agency action for

purposes of the Administrative Procedure Act.

Requests for supporting information, requests

for mathematical or mechanical corrections,

or notification to the insurer by the office

of its preliminary findings shall not toll

the 90-day period during any such proceedings

and subsequent judicial review. The rate

shall be deemed approved if the office does

not issue a notice of intent to approve or a

notice of intent to disapprove within 90 days

after receipt of the filing.

* * *

3. For all filings made or submitted after

January 25, 2007, but before December 31,

2008, an insurer seeking a rate that is

greater than the rate most recently approved

by the office shall make a "file and use"

filing. This subparagraph applies to property

insurance only. . . ..

(b) Upon receiving a rate filing, the office

shall review the rate filing to determine if

a rate is excessive, inadequate, or unfairly

discriminatory. In making that determination,

the office shall, in accordance with

generally accepted and reasonable actuarial

techniques, consider the following factors:

1. Past and prospective loss experience

within and without this state.

2. Past and prospective expenses.

3. The degree of competition among insurers

for the risk insured.

4. Investment income reasonably expected by

the insurer, consistent with the insurer's

investment practices, from investable

premiums anticipated in the filing, plus any

other expected income from currently invested

assets representing the amount expected on

unearned premium reserves and loss reserves.

The commission may adopt rules utilizing

reasonable techniques of actuarial science

and economics to specify the manner in which

insurers shall calculate investment income

attributable to such classes of insurance

written in this state and the manner in which

such investment income shall be used in the

calculation of insurance rates. Such manner

shall contemplate allowances for an

underwriting profit factor and full

consideration of investment income which

produce a reasonable rate of return; however,

investment income from invested surplus shall

not be considered.

5. The reasonableness of the judgment

reflected in the filing.

6. Dividends, savings, or unabsorbed premium

deposits allowed or returned to Florida

policyholders, members, or subscribers.

7. The adequacy of loss reserves.

8. The cost of reinsurance.

end factors, including trends in actual

losses per insured unit for the insurer

making the filing.

10. Conflagration and catastrophe hazards,

if applicable.

11. A reasonable margin for underwriting

profit and contingencies. For that portion

of the rate covering the risk of hurricanes

and other catastrophic losses for which the

insurer has not purchased reinsurance and has

exposed its capital and surplus to such risk,

the office must approve a rating factor that

provides the insurer a reasonable rate of

return that is commensurate with such risk.

12. The cost of medical services, if applicable.

13. Other relevant factors which impact upon

the frequency or severity of claims or upon

expenses.

* * *

(d) If conflagration or catastrophe hazards

are given consideration by an insurer in its

rates or rating plan, including surcharges

and discounts, the insurer shall establish a

reserve for that portion of the premium

allocated to such hazard and shall maintain

the premium in a catastrophe reserve. Any

removal of such premiums from the reserve for

purposes other than paying claims associated

with a catastrophe or purchasing reinsurance

for catastrophes shall be subject to approval

of the office. Any ceding commission

received by an insurer purchasing reinsurance

for catastrophes shall be placed in the

catastrophe reserve.

(e) After consideration of the rate factors

provided in paragraphs (b), (c), and (d), a

rate may be found by the office to be

excessive, inadequate, or unfairly

discriminatory based upon the following

standards:

1. Rates shall be deemed excessive if they

are likely to produce a profit from Florida

business that is unreasonably high in

relation to the risk involved in the class of

business or if expenses are unreasonably high

in relation to services rendered.

2. Rates shall be deemed excessive if, among

other things, the rate structure established

by a stock insurance company provides for

replenishment of surpluses from premiums,

when the replenishment is attributable to

investment losses.

* * *

(f) In reviewing a rate filing, the office

may require the insurer to provide at the

insurer's expense all information necessary

to evaluate the condition of the company and

the reasonableness of the filing according to

the criteria enumerated in this section.

102. As a preliminary manner, the parties have asserted

different views regarding the issuance of clarification letters,

or the lack thereof, with respect to these filings. Hartford

claims that it has always been the practice of OIR to issue

clarification letters to insurers making rate filings and that

many issues regarding documentation may be cleared up through

ongoing communication with the OIR. OIR responds that the

issuance of a clarification letter is not statutorily required.

Further, OIR asserts that the amendments to Section 627.027 make

it a requirement that all documentation must be included in the

filing, and therefore there is no longer a place for a

clarification letter in the rate review process.

103. OIR bases its position on the addition of Subsection

627.062(9), Florida Statutes, which states in pertinent part:

(9)(a) Effective March 1, 2007, the chief

executive officer or chief financial officer

of a property insurer and the chief actuary

of a property insurer must certify under oath

and subject to the penalty of perjury, on a

form approved by the commission, the

following information, which must accompany a

rate filing:

1. The signing officer and actuary have

reviewed the rate filing;

2. Based on the signing officer's and

actuary's knowledge, the rate filing does not

contain any untrue statement of material fact

or omit to state a material fact necessary in

order to make the statements made, in light

of the circumstances under which such

statements were made, not misleading;

3. Based on the signing officer's and

actuary's knowledge, the information and

other factors described in paragraph (2)(b),

including but not limited to, investment

income, fairly present in all material

respects the basis of the rate filing for the

periods presented in the filing; and

4. Based on the signing officer's and

actuary's knowledge, the rate filing reflects

all premium savings that are reasonably

expected to result from legislative

enactments and are in accordance with

generally accepted and reasonable actuarial

techniques.

104. Contrary to the OIR's assertions, nothing in this

amendment requires that all documentation upon which an insurer

might possibly rely must be included in the filing itself. The

amendment does require that the insurer closely scrutinize its

filings and insure that all factors identified in Section

627.062(2)(b) "fairly present in all material respect the basis

for the filing." The filing cannot, by commission or omission,

make any misleading or untrue statements. Florida Administrative

Code Rule 69O-170.013(5) clearly makes it the insurer's

responsibility to include all information it wants considered to

support the rate filing, and this requirement is not new.

However, other parts of Section 627.027 which the Legislature

chose not to delete still clearly allow for additional

information to be provided to the OIR upon request, and the OIR's

rules still contemplate such a process. See , e.g. ,

§627.027(2)(a)1.,(f), Fla. Stat.; Fla. Admin. Rule 69O-

170.013(2), (6)(a), (b). However, issuance of a clarification

letter is a matter within the discretion of OIR. While it might

have been better practice to issue letters of clarification to

address some issues in the filing, failure to do so is not fatal

to the Notices of Intent to Disapprove.

105. As stated in the findings of fact, the level of

documentation provided in these filings is consistent with both

the Standards of Actuarial Practice and with the level of

documentation previously required by OIR. Given that actuarial

practice is not by definition an exact science and involves the

exercise of judgment by reasonable professionals, Hartford's

general position with respect to the level of documentation

required is reasonable.

106. The parties also have divergent views regarding what

is required with respect to the use of catastrophic models. The

operative statute is Section 627.0628, Florida Statutes, which

provides in pertinent part:

(1)(c) It is the intent of the

Legislature to create the Florida

Commission on Hurricane Loss Projection

Methodology as a panel of experts to

provide the most actuarially

sophisticated guidelines and standards

for projection of hurricane losses

possible, given the current state of

actuarial science. It is the further

intent of the Legislature that such

standards and guidelines must be used by

the State Board of Administration in

developing reimbursement premium rates

for the Florida Hurricane Catastrophe

Fund, and, subject to paragraph (3)(c),

may be used by insurers in rate filings

under s. 627.062 unless the way in which

such standards and guidelines were

applied by the insurer was erroneous, as

shown by a preponderance of the

evidence.

* * *

3) ADOPTION AND EFFECT OF STANDARDS AND

GUIDELINES.--

(a) The commission shall consider any

actuarial methods, principles, standards,

models, or output ranges that have the

potential for improving the accuracy of or

reliability of the hurricane loss projections

used in residential property insurance rate

filings. The commission shall, from time to

time, adopt findings as to the accuracy or

reliability of particular methods,

principles, standards, models, or output

ranges.

(b) In establishing reimbursement premiums

for the Florida Hurricane Catastrophe Fund,

the State Board of Administration must, to

the extent feasible, employ actuarial

methods, principles, standards, models, or

output ranges found by the commission to be

accurate or reliable.

(c) With respect to a rate filing under

s.627.062, an insurer may employ actuarial

methods, principles, standards, models, or

output ranges found by the commission to be

accurate or reliable to determine hurricane

loss factors for use in a rate filing under

s. 627.062. Such findings and factors are

admissible and relevant in consideration of a

rate filing by the office or in any

arbitration or administrative or judicial

review only if the office and the consumer

advocate appointed pursuant to s. 627.0613

have access to all of the assumptions and

factors that were used in developing the

actuarial methods, principles, standards,

models, or output ranges, and are not

precluded from disclosing such information in

a rate proceeding. In any rate hearing under

s. 120.57 or in any arbitration proceeding

under s. 627.062(6), the hearing officer,

judge, or arbitration panel may determine

whether the office and the consumer advocate

were provided with access to all of the

assumptions and factors that were used in

developing the actuarial methods, principles,

standards, models, or output ranges and to

determine their admissibility.

107. The disagreement stems from the perceived requirements

of Subsection 627.0628(3)(c). OIR contends that "access" as

contemplated by this subsection means that the assumptions and

factors be provided as part of the rate filing under review by

the insurer. Hartford contends that both the consumer advocate

and the OIR were provided access to the factors and assumptions,

both through the Hurricane Commission approval process and

through meetings with RMS, and written submissions to OIR.

108. The operative language of subsection (3)(c) is that

OIR and the consumer advocate must "have access to all of the

assumptions and factors that were used in developing the

actuarial methods, principles, standards, models, or output

ranges, and are not precluded from disclosing such information in

a rate proceeding." OIR's interpretation of this language is

that the insurer, as opposed to the modeling entity such as RMS,

must furnish the information as part of the rate filing itself.

While it complaints that not enough information has been

provided, OIR has never identified in this proceeding what it

believes it needs in order to have sufficient information, or why

it chose not to take full advantage of the access offered.

Moreover, the statute does not state who must provide access, or

when the access must be provided. It simply says the OIR must

have the access and it must be able to disclose the information

in a rate proceeding.

109. Given the limited number of approved models compared

to the number of insurers required to make rate filings with the

Office, it seems more reasonable that having access to the

assumptions and factors would come from the entity developing the

models, whose trade secrets are often at stake, and who seeks

approval from the Hurricane Commission for the models to be used.

The plain language of the statute requires access. It does not

require the insurer to provide the factors and assumptions.

110. As stated in the findings of fact, both the Consumer

Advocate and the OIR were provided access to the factors and

assumptions used by RMS in connection with its catastrophic

model. RMS offered access directly, both in terms of information

furnished to the OIR, and by offers to allow direct access at its

Tallahassee office. Hartford offered to assist OIR in obtaining

any information that it felt it needed but did not have. These

actions met the requirement of access as contemplated by Section

627.0628(3)(c). 5/

111. With respect to the homeowners filings, OIR identified

thirteen items that it contended represented deficiencies in the

filings, and upon which it concluded the rates requested in the

filings would be excessive. While the alleged deficiencies

arguably all related to the requirement that the rates not be

excessive, inadequate or unfairly discriminatory, the Notices of

Intent to Disapprove do not reference the standards enumerated in

Section 627.062(2)(e), Florida Statutes, and do not reference any

rule.

112. With respect to the deficiencies numbered 1-3, 5, 6, 9

and 12, based on the evidence presented, Hartford has

demonstrated by a preponderance of the evidence that the factors

at issue were sufficiently documented in accordance with

actuarial standards and based on reasonable actuarial judgment.

113. With respect to the deficiencies numbered 4 and 13,

the alleged deficiencies were either not tied to the standards

enumerated in Section 627.027(2)(e) or not required under OIR's

rules related to ratemaking. Specifically, with respect to

deficiency number 4, there is no requirement that an insurer use

Fast Track data when its own data is sufficient and provides a

more complete picture with respect to loss trends, as was the

case here. With respect to deficiency number 13, OIR pointed to

no actuarial standard or factor in Section 627.027(2)(b)

addressing documentation regarding the percentage of premium to

be returned in the form of loss payments. In both instances,

Hartford has demonstrated by a preponderance of the evidence that

the information provided in the filing was reasonable.

114. With respect to asserted deficiencies 7-8 and 10-11,

however, the totality of the evidence leads to the conclusion

that Hartford has not demonstrated that the proposed rate is not

excessive, inadequate or unfairly discriminatory. Specifically,

with respect to the underwriting profit and contingency factor at

issue in deficiency number 7, Hartford has not met the criteria

specified in Rule 69O-170.003(7), and an excessive underwriting

profit factor will by definition result in a rate indication that

is excessive.

115. Because the underwriting profit factor proposed by the

rate filing is excessive, the return on surplus comes into

question. Hartford has not demonstrated that the return on

surplus identified in the filing can stand independently of the

proposed underwriting profit and contingency factor. Asserted

deficiency number 8 also questions the use of a low-risk

investment yield and 35% income tax rate when neither is

indicative of Hartford's actual investment portfolio. Section

627.027(2)(b)4., Florida Statutes, contemplates use of actual

practices, as opposed to what was submitted here. As a result,

to the extent that alleged deficiency number 8 deals with these

issues, it must be sustained.

116. With respect to private reinsurance costs (deficiency

number 10), the greater weight of the evidence indicates that

while the overall costs of reinsurance and its purchase on a

nationwide basis is reasonable, the percentage of the private

reinsurance costs allocated to Florida is excessive, which would

lead to a higher rate indication. Likewise, for the reasons

expressed in the findings of fact, the amount allowed for loss

recoveries in determining the premium for CAT Fund reinsurance

rates results in an excessive premium. This also would lead to a

higher rate indication. Therefore, the bases for disapproval

identified in both deficiency numbers 10 and 11 are sustained.

117. With respect to the dwelling/fire filings, OIR

indicated at hearing that it was withdrawing deficiency number 1.

Hartford has met its burden of showing that the factors

identified in 4 and 8 were sufficiently documented, consistent

with actuarial standards and based on sound actuarial judgment.

With respect to deficiency number 7, the asserted deficiency is

inconsistent with the requirements of Florida Administrative Code

Rule 69O-170.0135(2)(e)5. With respect to this deficiency, as

well as deficiency number 9, Hartford has demonstrated that the

filings were appropriately documented and based on reasonable

actuarial judgment.

118. Finally, with respect to alleged deficiencies numbered

2-3 and 5-6, these deficiencies have been sustained for the same

reasons expressed above for the corresponding deficiencies in the

homeowner filings (homeowner deficiencies 7-8 and 10-11).

RECOMMENDATION

Upon consideration of the facts found and conclusions of law

reached, it is

RECOMMENDED:

That a final order be entered that disapproves the rate

filings in Case Nos. 07-5185 and 07-5186 based upon the

deficiencies numbered 7,8,10 and 11 in the Notices of Intent to

Disapprove, and that disapproves the rate filings in Case Nos.

07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and

6 in the Notices of Intent to Disapprove.

DONE AND ENTERED this 28th day of March 2008, in

Tallahassee, Leon County, Florida.

S

LISA SHEARER NELSON

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 28th day of March, 2008.

ENDNOTES

1/ As previously noted, the deficiencies identified for both

homeowners filings are identical, and seven of those deficiencies

are repeated for the dwelling fire filings. While the figures

are different for each filing, the method used and the rationale

for using the method is the same. For the sake of simplicity,

each deficiency will be identified by the number associated with

the homeowners filings, followed by the additional asserted

deficiencies identified with dwelling/fire policies. Further,

counsel for OIR stated at hearing that deficiency number 1 with

respect to the dwelling/fire filings was not going to be pursued.

2/ In 1992, non-hurricane losses were listed as 66.4% of premium,

while in 1993, they were 27%.

3/ The ratios vary from 1.08 to 1.5 in the various filings.

4/ The documents presented in the filings seem to be

contradictory in this regard. Compare, for example, Exhibit

VIII, sheet 7a with Exhibit VIII, sheet 7c in Joint Exhibit 2.

While sheet 7a appears to support the assertion that Florida

represents 65% of catastrophic loss, sheet 7c appears to indicate

that Florida homeowners hurricane losses represents only 27.7% of

such losses. No testimony was presented to explain the apparent

inconsistency between these statements. Absent such an

explanation, the undersigned cannot conclude that the current

allocation is reasonable.

The undersigned also notes that the numbers reflected in the

findings of fact reference only the homeowners filing in Case

No. 07-5185. At hearing, both parties used that particular

filing as representing the methodology for all four filings. No

testimony was presented regarding the specific percentages in the

other filings, but based upon the witnesses' testimony that their

responses would be the same for each filing, the determination

that the allocation of reinsurance is not a reasonable allocation

applies to all four filings.

5/ At hearing, OIR, who was the Respondent in this case,

attempted to present the testimony of Howard Eagelfeld, as

"rebuttal" to testimony regarding the role of the OIR's

representative on the Hurricane Commission. Mr. Eagelfeld was

not listed as a witness for the OIR in the parties' Prehearing

Statement.

The issues related to the access provided to OIR with respect

to hurricane models was clearly an issue pursued by OIR in the

cross-examination of the Petitioner's witnesses. The undersigned

did not allow Mr. Eagelfeld to testify because OIR cited no

authority for allowing a respondent to present "rebuttal." OIR

claims this was error, citing Rose v. Madden & McClure Grove

Service , 629 So. 2d 234, 236 (Fla. 1st DCA 1993), and quoting the

following:

Under the usual order of presentation of

evidence at trial, the plaintiff will first

introduce evidence to prove the facts

necessary to enable recovery. Then the

defense presents evidence in support of its

case, including evidence not only that denies

or contradicts plaintiff's claim but also

that supports any pleaded affirmative

defenses. The plaintiff is now entitled to

present a case in rebuttal, refutation

evidence that denies, explains, disproves or

otherwise sheds light on evidence offered by

the defense. If new points are brought out

during plaintiff's rebuttal, the defendant

may meet them by evidence in rejoinder,

otherwise known as surrebuttal.

What OIR does not state is that in the Rose case, the

employer/carrier did not name two expert witnesses on its

pretrial witness list. Just before the presentation of the E/C's

case, it informed the judge that it would be presenting the two

experts' testimony, claiming they were "rebuttal" witnesses. The

witnesses were allowed and on appeal, the district court found

that allowing their testimony was error, stating,

The E/C endeavors to stretch the meaning of

rebuttal far beyond its common definition and

usage. If one were to accept the E/C's

definition, then arguably those defendants

who intended to present contradictory

testimony -- a majority of cases --would be

able to take advantage of the rule excusing

them from pretrial disclosure of rebuttal

witnesses.

629 So. 2d at 236. The same could be said here. In any event,

the undersigned has carefully reviewed the transcript to see

whether the rebuttal presented by Hartford had anything to do

with the Hurricane Commission or access pursuant to Section

627.0628. It did not.

COPIES FURNISHED:

Donna E. Blanton, Esquire

David A. Yon, Esquire

Radey, Thomas, Yon & Clark, P.A.

301 South Bronough Street, Suite 200

Tallahassee, Florida 32301

Elenita Gomez, Esquire

S. Marc Herskovitz, Esquire

Office of Insurance Regulation

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399

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.