69O-175.001. Calculation and Use of Investment Income in Motor Vehicle Insurance Rates

(1) This rule shall apply to rates filed or reviewed pursuant to Section 627.0651, F.S.

(2) The purpose of the rule is to specify the manner in which insurers shall calculate investment income attributable to motor vehicle insurance policies written 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 allowance compatible with a reasonable rate of return.

(3) As used herein:

(a) Auto insurance means private passenger motor vehicle insurance as defined in Section 627.041(8), F.S.;

(b) Liability subline means the sublines of auto insurance in the aggregate commonly considered to be auto liability insurance;

(c) Physical Damage subline means the sublines of auto insurance in the aggregate commonly considered to be auto physical damage insurance.

(4) Each insurer shall determine the expected patterns of loss payments over time associated with a policy of auto insurance written in Florida. These patterns of loss payments shall be determined separately for the Liability subline of auto insurance and for the Physical Damage subline of auto insurance. The determination shall be made using Florida accident year or policy year loss payment patterns, and must fairly represent the auto insurance loss transactions of the insurer.

(5) Each insurer shall determine YA, the expected investment income yield on invested assets representing unearned premium and loss reserves. The expected investment income yield, YA, shall be calculated using the quantities and formula below:

YA = YnWn + YoWo

Where:

Yn=Expected investment income yield on assets newly invested or reinvested during the time the new rates are expected to be in effect

Yo=Expected investment income yield on assets invested prior to the time the new rates are expected to be in effect

Wn=Proportion of assets, held during the time the new rates are expected to be in effect, that is expected to be newly
invested or reinvested

Wo = 1 – Wn

The above expected investment income yield, Ya, shall be used for purposes of this rule unless evidence is presented that this quantity is not the investment income yield reasonably expected by the insurer.

(6) Separately for the Liability subline and the Physical Damage subline, each insurer shall determine the discounted value of the expected loss payment pattern determined in subsection (4) using the expected investment income yield, Ya, calculated in subsection (5). The undiscounted pattern minus the discounted pattern for each subline is to be expressed as a percent of the expected subline premium that is associated with the series of loss payments over time. This difference is the investment income opportunity associated with the subline.

(7) The investment income opportunities calculated in subsection (6) shall be used as follows to develop the underwriting profit allowance, as distinguished from the contingency factor, to be used in rate filings:

(a) Select and specify the underwriting profit allowance to be used in rate filings for the Physical Damage subline. The selected underwriting profit allowance is presumed to give due recognition to Physical Damage investment income. An underwriting profit allowance greater than the quantity five percent minus any contingency factor utilized is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit allowance included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable expected rate of return. In such case, the criteria presented in subsection (8) shall be used by the Department of Financial Services in evaluating this supporting evidence.

(b) Determine the investment income differential between the Physical Damage and Liability sublines by subtracting the investment income opportunity for the Physical Damage subline as calculated in subsection (6) from the investment income opportunity for the Liability subline as calculated in subsection (6).

(c) The underwriting profit allowance for the Liability subline shall be the underwriting profit allowance for the Physical Damage subline from paragraph (7)(a), minus the investment income differential from paragraph (7)(b), subject to the provisions of paragraph (7)(d).

(d) If the underwriting profit allowance in paragraph (7)(c) is negative, then the insurer may deviate from the underwriting profit allowance in paragraph (7)(c) only to the extent needed to give a positive underwriting profit allowance.

(8) All provisions for contingencies shall be derived utilizing reasonable actuarial techniques, and appropriate supporting material shall be included in the rate filing. Provisions for contingencies greater than 1.5% of premium are prima facie excessive and unreasonable until actuarially supported by clear and convincing evidence. Provisions for contingencies shall be added to the underwriting profit allowance, as determined under subsection (7) of this rule, in order to produce the percentage factor included in the rate filing for profit and contingencies.

(9) An underwriting profit allowance calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth plus provisions for contingencies. 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 auto 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 commensurate with the rate of return anticipated for other industries having corresponding risk and sufficient to assure confidence in the financial integrity of the company so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or a reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium reasonably expected during the time the rates under scrutiny are in effect.

(10) If an insurer writes less than one half (1/2) of one percent of the Florida market for a subline of insurance, calculated by dividing the current premiums written by the preceding year’s total premiums written in the state for that subline, then the insurer shall use industry data for purposes of subsection (4) of this rule unless evidence is presented that such use of industry data by the insurer does not produce a reasonable expected rate of return for the insurer. The Office of Insurance Regulation shall provide industry data to such an insurer.

(11) Patterns of loss payments for the insurance coverage components of the sublines of auto insurance specified in subsection (4) may be developed if needed to be consistent with an insurer’s rating practice. The loss payment patterns shall be used in subsections (6) and (7) to produce an investment income differential and underwriting profit allowance for the components of the sublines of auto insurance similar to the investment income differential and underwriting profit allowance calculated for the Liability and Physical Damage sublines. For purposes of applying this subsection, when it is deemed necessary to do so, the component with the smallest investment income opportunity as calculated by the subsection (6) method shall be substituted for the Physical Damage subline in applying paragraph (7)(a). The remaining components shall individually be substituted for the Liability subline in applying paragraphs (7)(b)-(d) for each such component.

(12) Each insurer filing auto insurance rates in Florida shall use an underwriting profit allowance for each subline that is developed in accordance with this rule.

Specific Authority 624.308(1), 627.0651(2)(d) FS. Law Implemented 624.307(1), 627.031(1), (2), 627.0651(1), (2)(d) FS. History–New 10-1-82, Amended 6-28-84, Formerly 4-57.01, 4-57.001, 4-175.001.