DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Expedited Rate Filings
Calculations for Private Passenger Automobile Insurance Rate Changes
Adopted New Rules: N.J.A.C. 11:3-16B
Proposed: August 6, 2001 at 33 N.J.R. 2574(a)
|Adopted:||November 21, 2001 by Donald Bryan, Acting Commissioner, Department of Banking and Insurance|
|Filed:||November 21, 2001 as R. 2001 d.481, with substantial and technical changes not requiring additional public notice and comment (see N.J.A.C. 1:30-6.3)|
Authority: N.J.S.A. 17:1-8.1; 17:1-15e; 17:29A-1 et seq.; 17:29A-46.6 and 46.7 and P.L. 1997, c. 151, section 35
Effective Date: December 17, 2001
Expiration Date: January 4, 2006
Summary of Public Comments and Agency Responses:
The Department received 17 timely comments to the rule proposal from:
Jeremy S. Hirsch, Associate Vice President of Public Affairs,
Independent Insurance Agents of New Jersey
Mitchell A. Livingston, Esq., Sterns & Weinroth representing the American International Insurance Company of NJ.
Brian Stella, Counsel, Motor Club of America Insurance Company
Paul Anzano, Esq., Pringle Quinn Anzano, representing the Liberty Mutual Group
Donald S. Cleasby, Asst. General Counsel, National Association of Independent Insurers
Mark T. Torok, Counsel, United Services Automobile Insurance Association
Robert H. Zetterstrom, Assistant Vice President, NJM Insurance Companies
Charles D. Vogel, Counsel, State Farm Insurance Companies
Richard M. Stokes, Assistant Vice President, Alliance of American Insurers
John K. Tiene, President, Insurance Council of New Jersey
Robert L. Simmons, Regional Counsel, Allstate New Jersey Insurance Company
Frank J. Pensabene, Resident Manager, NJ PAIP
Kevin J. Curry, Assistant Compliance Officer, First Trenton Companies
Roger A. Brown, Sr. Vice President, Harleysville Insurance
John J. Marchione, Assistant Vice President, Selective Insurance Group
John Andryszak, Assistant Vice President, American Insurance Association
COMMENT: Many commenters were gratified that the Department had proposed rules to implement the statute that was enacted in 1997. Some commenters noted that the repeal of the "flex rate" had taken away the ability of companies to get small rate increases based on inflation and that this had contributed to the difficulties currently being experienced in the market. However, the majority of commenters expressed a general opinion that the filing requirements were too complex and were only a modification of the prior approval process. Several commenters noted that small filers would not be able to use the process because they did not employ actuaries. In addition, many commenters believed that the filing requirements in the proposal are too restrictive and do not allow for variation, where necessary from standards set forth in rules. In addition, the commenters stated that the rules preclude the exercise of independent actuarial judgment.
RESPONSE: Concerning the comments that the filings required by the proposal are too complex and are thus inconsistent with the statute, the Department does not agree. N.J.S.A. 17:29A-46.6(c) requires that rate changes made in accordance with the expedited procedure should not be, "excessive, inadequate for the safety and soundness of the insurer, or unfairly discriminatory..." This means that there must be a positive rate indication for the filer. In the proposal, the Department had attempted to require the minimum information necessary to produce a rate indication. Nevertheless, the Department has incorporated many of the suggestions on the filing requirements, as discussed below in response to comments on the individual sections. With regard to small filers, the Department recognizes the expense required and is exploring ways to make it easier for small companies to make these filings, which would be incorporated in a future amendment to the rules.
COMMENT: Several commenters stated that N.J.A.C. 11:3-16B.1(c), which limits expedited filings only to base-rate changes by coverage and territorial base rates, was not supported by the statute. Other commenters noted that this restriction was very stifling since insurers rarely want to make a rate change just to coverage and territory. This commenter also asked if the changes to model year factors could be included in the filing.
RESPONSE: The limitation on expedited filings to base rate by coverage and territory as proposed was intended to focus the filings and facilitate Department review of filings. As noted by the commenters, the Department acknowledges, however, that filers rarely make changes only to coverage and territory, which address only a portion of the rate, and that the effect of the restriction would seem to unduly limit the types of changes that could be made by filings pursuant to the rule. Under the rule as proposed, these other changes would have to be filed and analyzed separately.
Nothing in the rule a proposed limited a filer's ability to make such a separate filing contemporaneously that addresses other desired changes to its rating system but such a filing would have to be reviewed and approved separately. In determining how to address this issue, the Department notes, as mentioned by the commenters, that the statute does not restrict the kinds of changes that may be made by expedited filings but merely limits the effect of the changes to three percent overall and five percent by coverage. Moreover, requiring a separate filing to be separately reviewed would appear inconsistent with the intent of the statute to provide for the efficient and expeditious processing of minor changes, particularly if the changes would be better analyzed and decided together.
Therefore, the Department has amended N.J.A.C. 11:3-16B.1(c) upon adoption to include all likely changes that should reasonably be considered together, including expense fees, classifications, deductibles, increased limits factors, discounts and credits. Certain changes that apply to new business only, such as model year factors are appropriate to be analyzed and reviewed separately. However, a filer may make such a filing at the same time as an expedited filing and with the same effective date.
COMMENT: One commenter suggested that companies be able to combine data to calculate loss development factors for some of the liability coverages because of low volume.
RESPONSE: The Department agrees with the commenter and had amended the definition of coverage upon adoption by adding subparagraph 6; to permit the combination of UM data with liability data. In addition, the Department has amended the rule upon adoption to add a new subsection (a) to N.J.A.C. 11;3-16B.4 that tells filers how to develop indications based on the combination of coverages that have the maximum credibility.
COMMENT: Many commenters stated there is no statutory authority for the five percent cap on increases in a specific territory's base rate that is in the definition of "expedited process" found in N.J.A.C. 11:3-16B.2. The commenters urged the Department to substitute a higher cap on base rate changes or not have any cap at all but be subject to the overall cap of three percent.
RESPONSE: The commenters are correct that the statute, N.J.S.A. 17:29A-46.6(e) states that, "[T]the commissioner shall not approve any rate change pursuant to this expedited process that results in an overall increase of more than 3% or an increase in any single coverage of more than 5%", which does not include any limitations on territory increases. As noted above in response to a previous comment, the Department agrees with the commenters that the proposal might unduly limit the kinds of minor rating system changes permitted by the statute, and be inconsistent with the statutory intent of providing a prompt and efficient process for filings that propose these minor changes including rate differentials by territory, which could be separately but contemporaneously filed. Therefore, upon adoption, the rule is being amended to delete the definition of "expedited process," which is not a term actually used in the rule. In its place, the Department is adding a definition of "rate change" that follows the language of N.J.S.A. 17:29A-46.6(e) concerning the limitation on rate increases and inclusion of filings for any rate decrease. In addition, the definition of rate change includes filings that are revenue neutral, that is, do not produce an overall rate increase or decrease.
COMMENT: The NJPAIP noted that the proposed rules are written for voluntary market insurers and filers and do not make accommodations for rating organizations such as the Automobile Insurance Plans Services Office ("AIPSO"), a non-profit management organization that files rates and rules for NJPAIP. For example, N.J.A.C. 11:3-16B.3(a)1 requires that an expedited filing include a statement of the percentage and total dollar amounts of the change in rates by coverage and by territory. AIPSO does not have the data to provide such information. The commenter requested a reasonable accommodation for rating organizations when the proposed rule includes requirements with which only individual companies can comply.
RESPONSE: For the purposes of filing for a rate change, the Department considers the NJPAIP as one company. It is not necessary for the NJPAIP to calculate changes for each of its member companies.
COMMENT: Many commenters objected to the filing requirements in N.J.A.C. 11:3-16B.4 as too inflexible. One commenter noted that the statute did not permit the Department to adopt a methodology that was binding on the filer, while another commenter characterized this requirement as a violation of the filers' right of free speech and ability to petition the government for redress of grievances. Several commenters noted that a single required methodology does not permit filers to quickly react to changing market conditions. The commenters pointed to the statutory requirement for an actuarial certification that the filing is consistent with generally accepted actuarial principles as evidence of legislative intent to give the filer the ability to select different methodologies. Finally, one commenter stated if it was going to mandate a methodology, the Department should be bound by the indications developed by that methodology.
RESPONSE: The Department believes that mandating a methodology is appropriate to make review of over 60 filings per year possible, as well as to have consistency in results for all companies. However, in response to the commenters' concerns, the Department has amended the proposal upon adoption to add a subsection (k) to N.J.A.C. 11:3-16B.4 that will permit filers to submit an alternate methodology in addition to the one required by the rule. In order for the Department to consider any alternate methodology, a filer must make the complete filing required by the rule. An alternate methodology must be clearly identified as such in the filing and review of it will not be subject to the deadlines in N.J.A.C. 11:3-16B.6.
COMMENT: One commenter stated that the provision of N.J.A.C.11:3-16B.4(a)1iii and (a)2iii restricting use of ISO premium trend factors to ISO subscribers is not necessary since it is public information. Another commenter noted that it is not an ISO subscriber but purchases products and services from ISO for its rate development and requested a clarification in the language of the rule.
RESPONSE: ISO may make filings with the Department that, by law, are open to public inspection but if the contents of the filings are copyrighted, copying and use of the material is subject to copyright laws. In response to comments and the fact that it is not the Department that regulates ISO's relationships with its customers, the rule is being amended upon adoption to delete the provisions concerning the use of ISO data.
COMMENT: Concerning the requirement in N.J.A.C. 11:3-16B.4(a)2i that insurers must use incurred loss data in the filing, one commenter believed that insurers should have the ability to use paid losses for COMP and COLL because they have a short tail. Another commenter noted that N.J.A.C. 11:3-16B.4(a)2i, which uses calendar/accident year to develop loss expenses, is inconsistent with N.J.A.C. 11:3-16B.4(a)1i, which uses calendar years for earned premium. The commenters stated that the same basis should be applied to premium and losses. In addition, the commenters believed that the rule seems to preclude the use of fiscal accident year data, which would be more responsive to recent data.
RESPONSE: The Department agrees in part with the commenters and upon adoption has added a provision that permits filers that do not collect incurred loss data for COLL and COMP to use paid losses instead. In addition, a provision has been added at N.J.A.C. 11:3-16B.4(c)2iv that clarifies that the loss development factors ("LDF") calculated for COMP and COLL must be consistent with whichever loss data the filer used for these coverages. The Department does not agree with the comment that the same basis should be applied to losses and premiums. Premiums are always calculated on a calendar year basis and losses on an accident year basis. However, upon adoption, the N.J.A.C. 11:3-16B.4(c)1 has been amended to clarify that loss adjustment expenses are compiled by accident year. Concerning use of fiscal year data, the Department believes that to ensure consistency in results for all companies, a filer must use the methodology in the rule. However, as noted below in response to another comment, filers may file different data or methodologies in addition to the required data and calculations.
COMMENT: Several commenters objected to mandating a loss development method when there are changing claim practices that can effect loss development patterns. One commenter suggested permitting the use of countrywide loss development factors instead of NJ factors because NJ factors will lead to volatility in the loss level. Another commenter suggested that companies have the option of basing trend factor selections on company specific data instead of NJ data. Finally, another commenter recommended that the first sentence of N.J.A.C. 11:3-16B.4(a)2ii be amended to read, "New Jersey incurred loss development factors (LDFs) by coverage..."
RESPONSE: As noted above in response to another comment, the Department believes that a uniform methodology is appropriate for this type of filing. Filers may file different data or methodologies in addition to the required data and calculations.
COMMENT: Two commenters questioned how the five percent tail factor for BI, CSL, UM and PIP in N.J.A.C. 11:3-16B.4(a)2ii was determined and noted that it appeared arbitrary.
RESPONSE: The five percent tail factor was developed using industry averages.
COMMENT: Several commenters expressed concerns about the mandated use in N.J.A.C. 11:3-16B.4(a)2ii of the latest seven-year X HI/LO average as the base of the selected age-to-age factors. One commenter believed that a seven-year average was not indicative of current conditions and that the filer should be allowed flexibility in this calculation. The commenter recommended that if the Department was going to mandate a selection criteria, it should be five-year X HI/LO or a straight three- year method. Another commenter stated that excluding the highest and lowest of the latest seven age-to-age factors biases the ultimate projected losses to be less than they would be if all seven were averaged and suggested no exclusion of high/low values. This commenter also noted that there is no mention in the proposal of how many factors to use and whether to exclude high/low for older age-to-age periods with less than seven available factors. Finally, a commenter noted that it had not been in existence long enough to have seven link ratios in a loss development triangle. This commenter also noted that there is a potential for overlap in the loss development and AICRA base data adjustments that could lead to an understatement of AICRA adjusted ultimate losses and recommended that a filer should be able to account for this overlap. In addition, the commenter believed that 54 months for the development of PD, COMP, and COLL loss development factors should be 51months because 54 months is not an evaluation date.
RESPONSE: Upon adoption, the Department has amended the rule to use a five-year X HI/LO average on which to base selected age-to-age factors. If a filer does not have five link ratios, it should use the all year averages. With regard to the suggestion that the highest and lowest values not be excluded, the Department believes that its methodology is appropriate and notes that filers do have the ability to submit alternate calculations in addition to those mandated by the rule. Concerning the 54 months, the Department agrees with the commenter and has amended the rule upon adoption to use 51 months.
COMMENT: One commenter noted that industry fast-track data is a compilation of both ISO and NAII data, and therefore, the reference in N.JA.C. 11:3-16B.4(a)2iii should not refer to them in the alternative. In addition, this commenter stated that UM experience is not included in fast track.
RESPONSE: The Department agrees with the commenter and has amended the rule upon adoption to refer to fast-track data without any modifier. In addition, the inclusion of UM as a coverage included in the fast-track data has been deleted.
COMMENT: Several commenters objected to the fact that the methodology for calculating loss development factors is mandated by the rule at N.JA.C. 11:3-16B.4(a)2iii. These commenters believe that this does not allow for variation among different companies and companies ought to be able to use their own data if credible. Another commenter stated that basing loss trend on the latest ISO filing or industry fast-track data and requiring that the full amount of AICRA savings be reflected is duplicative because the data used to develop the trend already includes some AICRA cost savings. The commenter recommended that filers be permitted to adjust their loss trend to account for this duplication.
RESPONSE: As noted above in response to another comment, the Department believes that a uniform methodology is appropriate for this type of filing. Filers may file different data or methodologies in addition to the required data and calculations.
COMMENT: One commenter recommended that N.JA.C. 11:3-16B.4(a)2iii(1) be amended to provide for more accurate calculations by defining the period for which losses should be trended as, " from the midpoint of current rates to the midpoint of when rates are to be in effect, i.e., nine months past the proposed effective date for six mos. policies and 12 mos. past the proposed effective date for 12 mos. policies." Another commenter noted that the proposal did not mention how many points to use to calculate trend factors and recommended using 12 points.
RESPONSE: The Department agrees with the commenters that clarification of this point is appropriate and has amended the rule upon adoption to require that trend calculations be based on the 12-quarter rolling average.
COMMENT: One commenter noted that the proposal does not mention the treatment of catastrophic losses for COMP and suggested that this will lead to fluctuations in the COMP results based on the insurer's catastrophe loss experience over the last three years.
RESPONSE: The Department agrees that catastrophic losses for COLL and COMP ought to be addressed in the rule and has amended the rule upon adoption to permit filers to use country-wide fast-track data to smooth the effect of catastrophes. In addition, the Department has added a provision at N.J.A.C. 11:3-16B.4(c)6, which permits filers to exclude catastrophe losses from COMP data and substitute a load based on more stable results.
COMMENT: One commenter stated that under the old "flex rate" rule, defense cost triangle data only had to be shown for liability coverages. The proposal appears to require that this data be provided for PD coverages as well and the commenter requested clarification on this.
RESPONSE: The Department does not agree with the commenter. There are legal costs associated with PD coverage so a defense triangle is appropriate. Filings made pursuant to this rule differ from the old "flex rate" in that a calculation of a positive indication is required. For this reason, more data must be filed to support the rate change.
COMMENT: One commenter noted that N.JA.C. 11:3-16B.4(a)2iv requires that adjusting and other claims related expense ratios be determined from a three-year average of Insurance Expense Exhibit ("IEE") data. The commenter recommended that filers be able to select from different time periods for this calculation if there have been changes in the procedure of the company that would affect this ratio. Another commenter stated that filers should be able to include internal defense costs in calculating the three-year expenses from the IEE because they are not included in the base data.
RESPONSE: The Department does not agree with the commenters. As noted above in response to another comment, the Department believes that a uniform methodology is appropriate for this type of filing. Filers may file different data or methodologies in addition to the required data and calculations. Concerning the fact that internal defense data is not included in the IEE, it would be included elsewhere as an expense and thus would be reflected in the filing.
COMMENT: Many comments were received about N.JA.C. 11:3-16B.4(a)2v and vi that require the statutory AICRA rollback percentages to be reflected in filings made pursuant to this subchapter. Several commenters noted that the -12 percent rollback for UM coverage was not consistent with AICRA. Another commenter asked about the authority for the assumption of a 50/50 BI/PD split for CSL. Several commenters observed that the proposal was not clear as to what the part of the filing (losses or premiums and losses) the adjustments should apply. Other commenters noted that the proposal was not clear to what policies the adjustment should apply, since some insureds had their policies reissued before their renewal date in order to get the AICRA rate rollback. Finally many commenters objected to using the rollback percentages from the statute in their filings. The commenters noted that the rollback percentages in the statute were established prior to implementation of the statute and there should be enough data to determine if these percentages are reasonable. Another commenter noted that the rule should simply state that effects of applicable law shall be reflected without mandating any specific percentages.
RESPONSE: The Department has reviewed the comments received and has decided to amend the rule upon adoption to state only that a filing made pursuant to this subchapter shall reflect all applicable law changes, including AICRA, with an explanation of assumptions made. Adjustments only need to be made for accident years 1999 and 2000 and, as is evident from the comments, mandating a specific methodology would make the requirements very complex. Recognizing that filings made pursuant to this subchapter should reflect the Legislature's intent that the process be expedited, the Department will not mandate the methodology for calculating AICRA cost reductions.
COMMENT: One commenter stated that the methodology in the rule for calculating loss and loss adjustment expense ratios in N.J.A.C. 11:3-16B.4(b)3 has no provision for dividends. The commenter believed that a company that truly exists for its policyholders should not be prevented from recognizing some portion of its dividend when filing for small rate adjustments such as those permitted by this subchapter.
RESPONSE: The Department agrees with the commenter that there was no methodology in the proposal to address dividends, which are premium monies that are returned to policyholders, as an expense. Dividends are recognized as an expense in the Excess Profits calculation (N.J.A.C. 11:3-20.5). The Department has determined that the simplest way to address this issue in filings made pursuant to this subchapter is to exclude any paid or incurred dividends from the amount of premium included in the filing. Therefore, the Department is amending the rule upon adoption to include definitions of "written" and "earned premium" that are net of dividends paid or incurred.
COMMENT: One commenter stated that companies should be allowed to make selections other than the three year average of expenses required by N.J.A.C. 11:3-16B.4(b)3ii(1) if it is known that future expenses will be different from those in the past. Another commenter requested the flexibility to use other methods of limiting expenses, such as those approved in other filings or adopted by an Administrative Law Judge in a rate case.
RESPONSE: As noted above in response to another comment, the Department believes that a uniform methodology is appropriate for this type of filing. Filers may file different data or methodologies in addition to the required data and calculations.
COMMENT: Several commenters objected to the requirement in N.J.A.C. 16B.4(b)3ii(4) that the Clifford formula be used to calculate company profits. The commenters believe that use of the Clifford formula to determine profit is not, as suggested by Summary, normally used by companies and is not readily available to companies. This requirement that is unique to New Jersey should be eliminated and companies should be allowed to use different profit methodologies.
RESPONSE: The Department does not agree with the commenters. N.J.S.A. 17:29A-36.1 requires that the Department adopt a standard ratemaking methodology for auto insurance rates. The 3.5 percent profit after taxes limit, known as the Clifford formula, is part of that ratemaking methodology. To ensure consistency in results for all companies, a filer must use the Clifford formula to calculate profits. However, as noted below in response to another comment, filers may file different data or methodologies in addition to the required data and calculations.
COMMENT: Several commenters objected to the methodology in N.J.A.C.11:3-16B.4(b)4i(1) for calculating credibility. These commenters noted that there is no actuarial support for 4,000 claims to be the only appropriate level for full credibility. Another commenter stated that the 4,000 claim standard had not been used in all rate filings approved by the Department and that an ALJ rejected the standard in a recent rate case. Another commenter observed that the standard may result in an inaccurate rate level for smaller companies because so little credibility weight will be given to their own data.
RESPONSE: The Department agrees with the commenters that for certain coverages and limits, the 4,000 claim credibility standard is not the only one that can be used. Upon adoption, the Department has amended the rule to incorporate a 3,000 claim standard for those coverages and limits that are less variable in severity. In addition, the Department is clarifying the requirements by reversing the order of the paragraph provisions. In paragraph (f)1 the credibility standards for which the filer does not have to produce any supporting calculations are set out. In paragraph (f)2, there are instructions for the calculation of a different credibility standard and paragraph (f)3 explains how to use the results of paragraph (f)1 or 2 determine the credibility for each coverage.
COMMENT: One commenter noted that the proposal mandates the use of a three-year indication. The commenter believed this is adequate for small companies but large companies should have the option of basing their indication on less than three years of data if it is credible.
RESPONSE: The Department agrees with the commenter and has amended the rule upon adoption and added in N.J.A.C. 11:3-16.4(a)1 to permit filers to use less than three years of data if it is credible. As discussed in response to an earlier comment. N.J.A.C. 11:3-16B.4(a) also tells filers how to combine coverages to obtain the maximum credibility for the types of policies they market.
COMMENT: Several commenters stated that in N.J.A.C. 11:3-16B.4(a)5iv, the overall indication results should be weighted by the on-level earned premium trended into the future, not the latest available annual written premium. The commenters believed that using the on-level earned premium would better reflect current conditions than written premium.
RESPONSE: The Department agrees with the commenters and has amended N.J.A.C. 11:3-16B.4(h) upon adoption to make the change suggested by the commenters.
COMMENT: One commenter believed that companies should be able to use the rate relativity of a competitor as a complement of credibility in N.J.A.C. 11:3-16B.4(b)2.
RESPONSE: The Department does not agree with the commenter. It is not appropriate to use another company's rate relativity, even if it could be calculated and applied, because the other company may have a very different book of business.
COMMENT: One commenter recommended that the proposal should contain the limitation on the number of filings contained in N.J.S.A. 17:29A-46.6(f).
RESPONSE: The Department agrees and has added N.J.A.C. 11:3-16B.5(d) to include the statutory limitation of a filer being allowed no more than one rate-change request pursuant to this subchapter approved in any 12-month period.
COMMENT: One commenter noted that the language in N.J.A.C. 11:3-16B.6(a) gives the standard for approval of a filing is that the resultant rates not be excessive, inadequate or unfairly discriminatory, which means that if a filer showed a need that is greater than three percent, the Commissioner must disapprove the filing. The commenter believed this made the proposal of little practical value to companies in avoiding rate discrepancies. Another commenter pointed out that there appears to be a typographical error in the language of this provision, which otherwise follows the statute.
RESPONSE: The Department does not agree with the commenter's interpretation of this provision. The language is the standard that applies to the Department's review of all rate requests. A rate filing made pursuant to this subchapter is limited to three percent overall, regardless of the indication. The Department is not prohibited from approving a three-percent increase if the indication is higher. It is up to filer to decide to make a prior approval filing in addition to or instead of the expedited filing. Concerning the typographical error, the Department is amending the rule upon adoption to correct the error and make other grammatical changes in the language.
COMMENT: One commenter suggested that the rule define the term "qualified actuary." A certification from a qualified actuary must accompany a filing made pursuant to the rule.
RESPONSE: The Department does not agree with the commenter. The term is used in its general sense, not as a term of art.
COMMENT: Several comments were received on N.J.A.C. 11:3-16B.6(c). One commenter stated that if the Department rejects a filing as provided in the proposal, the filer is entitled to specific information about the reasons for rejection. Another commenter asked for more definition of when a filing would be rejected and what opportunities for appeal of the rejection were available to the filer. Other commenters expressed the opinion that the completeness review described in this subsection should be deleted because it was too subjective and was not authorized by the statute.
RESPONSE: The Department agrees with the commenters that the term "rejected" is not appropriate in this context. The Department has amended the rule upon adoption to require that the filer be notified of any deficiencies in the filing within 20 days of receipt. In addition, "rejection" has also been deleted from N.J.A.C. 11;3-16B.6(d). The Department believes that the completeness review benefits the filers by identifying problems with the filing early in its review. The Department's experience is that a certification of completeness by an actuary is no guarantee that all necessary information is in fact included in the filing. An early completeness review could prevent the disapproval of a filing at the end of the process because the necessary information was not included.
COMMENT: Two commenters stated that the Department should deem filings approved if a decision is not rendered within the time frames stated in the rule.
RESPONSE: N.J.S.A. 17:29A-46.4(d), as amended in response to the comment above, provides that a filing made pursuant to this subchapter is deemed approved unless rejected or modified by the Department during the time period. The rule at N.J.A.C. 11:3-16B.6(d), as amended in response to the comment period above states only that the Department will act on a filing within the statutory time periods. The Department believes that the rule text is consistent with the statutory language and no amendment is required.
COMMENT: The Department received several comments on N.J.A.C. 11:3-16B.6(e). One commenter pointed out what it believed was an incorrect reference to N.J.A.C. 11:3-16B.6(a) in N.J.A.C. 11:3-16B.6(e). Another commenter believed that the Commissioner's option to disapprove an expedited filing is too open ended and is beyond the authority of the statute. The commenter noted the language in the statute that filings shall be approved if they meet the standard in the statute. Another commenter questioned what was meant by giving the Commissioner the authority to approve a filing "under different terms and conditions" in N.J.A.C. 11:3-16B.6(e). The commenter stated that the rule was not clear whether the insurer must agree to such changes or whether an insurer could withdraw the filing before it is approved on different terms or conditions.
RESPONSE: The Department does not agree with the commenter that the reference in N.J.A.C. 11:3-16B.6(e) to N.J.A.C. 11:3-16B.6(a) is incorrect. Subsection (a) is the statutory standard for acting on filings and is properly referenced as the basis for the Department's actions described in subsection (e).
The Department also does not agree with the commenter who believes that the ability of the Commissioner to disapprove a filing in N.J.A.C. 11:3-16B.6(e) is too open ended. The statute at N.J.S.A. 17:29A-46.6(d) specifically gives the Commissioner the ability to disapprove a filing. As noted above in response to other comments, the expedited filing is based on a rate indication. If the filer does not supply the information necessary to calculate a rate indication or a filing for a rate increase produces a negative indication, the filing will be disapproved. The Department believes this is consistent with the statutory language.
N.J.A.C. 11:3-16B.6(e)3, which permits the Commissioner to approve a filing under "different terms and conditions" was intended to address the circumstances where the rate change requested by the filer is not supported by the information in the filing. This can be the result of missing or incomplete data in the filing or from errors in the calculation. In such cases, the approval may be for something different than that filed. N.J.S.A. 17:29A-46.6(d) supports this possibility by stating that, " A filing shall be deemed to be approved unless rejected or modified by the commissioner within the time provided." (emphasis added). If a filer is not in agreement with the modifications made to the filing in the Department's review, it may withdraw the filing or, alternatively, the filing will be disapproved.
In an effort to clarify the Department's intent, this subsection has been amended upon adoption to refer to approval "as filed" in paragraph (e)1 and "[a]pprove a modified rate change filing" in paragraph (e)3
COMMENT: Many commenters objected to the provisions of N.J.A.C. 11:3-16B.6(h) and (i), which permit the Commissioner to suspend the time period for review of an expedited filing if a prior approval filing for the company is already pending and vice versa. The commenters believed that this provision is ultra vires. They noted that there is no reason to have a stay of the review period since rate relief granted in one filing can be reflected in the other. Other commenters stated that the proposal will force a filer to choose between an expedited and a prior approval filing.
RESPONSE: The Department agrees with the commenters and has amended the rule upon adoption to delete the stay provisions and substitute a requirement that companies amend any pending prior approval filing with a rate change approved through the expedited process. Likewise, any rate change approved through a prior approval filing shall be reflected in the expedited filing.
COMMENT: Two commenters stated that the data required for a filing listed in the Appendix appears to apply to a full prior approval filing, not a streamlined, expedited filing. Another commenter observed that the number of documents and required exhibits would be very time consuming to prepare, are in excess of that required for other states and do not reflect the intent of the statute.
RESPONSE: As noted above in response to another comment, an expedited filing must generate a rate indication. This differs from the requirements in other states. The Department believes that the data required in the Appendix is the minimum necessary to derive a rate indication.
Summary of Agency-Initiated Changes:
N.J.A.C. 11:3-16B.4 has been extensively recodified in addition to changes made in response to comments. The proposal included all the data requirements of the filing under subsection (a). In the adoption, this subsection has been recodified so that each element of the filing, for example, premium, losses, expenses, loss development factors, credibility, etc. is a separate subsection. In addition, the Department has made an effort to clarify the filing procedures both in response to specific comments and upon its own review, as follows:
N.J.A.C. 11:3-16B.4(c): the Department has substituted the more traditional abbreviation of "ALAE" for "Defense" and "ULAE" for "Adjusting."
N.J.A.C. 11:3-16B.4(d) has been amended upon adoption and subsection (e) has been added to explain the methodology for calculating expenses more clearly, the methodology itself has not been changed.
N.J.A.C. 11:3-16B.4(g) this subsection has been revised upon adoption to clarify the trends to be used in the calculation.
As a result of the expansion of the types of filings that can be made by the expedited process, a new N.J.A.C. 11:3-16B.4(j) has been added upon adoption to describe the data or calculations that must accompany those types of filings.
Federal Standards Statement
A Federal standards analysis is not required because these rules regulate the business of automobile insurance, which is governed by Title 17 of the New Jersey Statutes, and is not subject to any Federal requirements or standards.
Full text of the adopted new rules follow (additions to proposal indicated in boldface with asterisks *thus*; deletions from proposal indicated in brackets with asterisks *[thus]*):
|SUBCHAPTER 16B.||EXPEDITED PROCESS; CALCULATIONS FOR PRIVATE PASSENGER AUTOMOBILE INSURANCE RATE CHANGES|
11:3-16B.1 Purpose and scope
(a) - (b) (No change from proposal).
(c) These rules shall apply *[only]* to base rate changes by coverage*,* [and to]* territorial base rate changes*, expense fees, class factors, deductibles, increased limit factors and discounts and credits* *[and shall not apply to class relativities or to tier rating factors]*.
The following words and terms, as used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.
"Commissioner" means the Commissioner of the Department of Banking and Insurance in the State of New Jersey.
1. - 4. (No change from proposal).
*5. BI, PD and PIP combined ("PACK");
***6*. Uninsured and underinsured motorists, bodily injury and property damage combined ("UM");
*i. For developing the indications by coverage, UM data shall be combined with liability data in 1, 3 or 5 above;*
*[6.]**7,* Comprehensive ("COMP"); and
*[7.]**8,* Collision ("COLL").
*["Expedited process" means the procedure set forth in N.J.S.A. 17:29A-46.6, wherein an insurer or rating organization can seek an overall rate change of no more than a three percent and a single coverage or territory base rate change of no more than five percent upon the filing of an application described in this subchapter. ]*
*"Earned premium" ("EP") means direct, earned premium net of dividends paid or incurred.*
"Personal Automobile Insurance Plan" or "PAIP" means the New Jersey Personal Automobile Insurance Plan established by N.J.A.C. 11:3-2.
*"Rate change" means an rate increase of no more than three percent overall or not more than five percent in any single coverage. Rate change also means any decrease in rates or a change in rates that is revenue neutral.*
*"Written premium" ("WP") means direct, earned premium net of dividends paid or incurred.*
11:3-16B.3 Expedited filings; insurers and rating organizations
(a) An insurer and/or rating organization, pursuant to N.J.S.A. 17:33B-31, may *[make a filing to revise its base rates]* *file for a rate change* in accordance with this subchapter. The insurer shall provide the following information in support of its *[expedited]* filing:
1. A cover letter notifying the Department of its intention to*[adjust base]* *make a * rate*[s]* *change* according to the provisions of this subchapter; a statement of the percentage and total dollar amount of the change in rates by coverage *[and by territory]* for each company included in the filing with subtotals by group of coverages (liability versus physical damage) and an overall total in the format of Appendix Exhibit E of N.J.A.C. 11:3-16 incorporated herein by reference; a statement containing the effective date of the change; and the name, telephone number and mailing address of the company officer familiar with the filing to whom further inquiries regarding the filing may be directed;
2. - 3. (No change from proposal.)
4. The manual rating pages containing the territorial base rates by coverage to be implemented, accompanied by an explanatory memorandum showing the calculation of the new *[territorial base]* rates by coverage, using the existing *[territorial base]* rates by coverage as the starting point in the calculation. The memorandum shall also include the company's file number and effective dates for new and renewal policyholders; and
(b) (No change from proposal.)
11:3-16B.4 Expedited process calculations for private passenger automobile insurance
*(a) General requirements for expedited rate filings are as follows:
1. Filers shall provide coverage indications based on three accident years of data. For coverages that are fully credible based on less than three years of data, filers may use two accident years of data to calculate indications for those coverages;
2. Indications may be based on either total limit or basic limit data for the liability coverages;
3. Coverage indications shall be calculated as follows:
i. Filers that only sell split limits policies shall submit separate BI and PD indications;
ii. Filers that only sell CSL policies shall submit one CSL indication. However, the BI and PD portion of losses shall be developed and trended using separate loss development triangles and trend factors;
iii. Filers that sell both split limits and CSL policies can either submit separate BI, PD and CSL indications or allocate the CSL data between BI and PD;
iv. Filers that sell PACK policies can submit one indication for the policy but the BI, PD and PIP portion of the losses shall be developed and trended using separate loss development trianges and trend factors; and
v. UM data shall be combined with liability data in (a)3 i, ii, iii or iv above. Filers do not have to calculate a separate indication for UM.
*[(a)]* *(b)* Filers shall provide the following information regarding *[New Jersey]* *projected earned* premium*[, exposure, loss and expense data]*:
1. *[The projected]* *New Jersey (NJ)* earned premium *[shall be determined by:]** by coverage, by accident year;*
*[i. The latest available three calendar years of New Jersey (NJ) earned premium by coverage;]*
*[ii.]**2.* On-level factors by coverage, based on company specific historical NJ rate changes; and
*[iii.]**3.* The premium trend factors for COMP and COLL coverages, based on either annual selections from the latest approved Insurance Services Office (ISO) filing in NJ, or internal company data.
*[(1)]**i.* If supplying premium trend factors developed from internal company data, the filer shall provide all data and methodology. *[Use of ISO information is applicable only to filers that subscribe to ISO;]*
***(c)* Ultimate loss and loss adjustment expense ("LAE") shall be determined by:
*[i.]**1.* *[The latest available three calendar/accident years of]* NJ incurred loss and defense/cost containment expense ("*[Defense]**ALAE*"), by coverage, *by accident year* either combined (loss and *[Defense]* *ALAE*) or developed separately*;
*i. For COMP and COLL coverages, filers may use paid loss instead of incurred loss.*
*[ii.]**2.* New Jersey loss development factors (LDFs) by coverage, either combined (loss and *[Defense]* *ALAE*) or separately*[.]**;*
*i.* The selected age-to-age factors shall be based on the latest *[seven]**five*-year X HI/LO average, that is, using a straight average of the latest seven age-to-age factors, excluding the highest and the lowest.
*ii.* BI*[, CSL, UM]* and PIP LDFs shall be developed to 87 months, with a five percent tail factor from 87 months to ultimate.
*iii.* PD, COMP and COLL LDFs shall be developed out to ** *51* months, with no subsequent tail factor;
*iv. LDFs for COLL and COMP shall be consistent with the methodology used in (c)1 above.*
*[iii.]**3.* Loss trend factors shall be based on either annual selections from the latest approved ISO filing in NJ or the latest available NJ *[ISO or National Association of Independent Insurers (NAII) Industry]* Fast Track data, separately for severity and frequency by coverage (BI*[/UM]*, PIP, PD, COMP, COLL).
*[(1)]**i.* If supplying Fast Track trend factors developed by the company, the filer shall *use the 12 quarter-rolling average and* provide all data and calculations. *[Use of ISO information is applicable only to filers that subscribe to ISO;]*
ii. *For COLL and COMP, filers may use country-wide Fast Track data to smooth out the effect of catastrophes;*
*[iv]**4.* Adjusting and other claims related expense*s* *[ratio]* (*["Adjusting"]**"ULAE"*) shall be determined *[from the latest three year average]* *as a ratio* of incurred *[Adjusting]* *ULAE* to incurred loss *[and]* *plus* incurred *[Defense data]* *"ALAE"* from the *latest three-year average of* Countrywide Insurance Expense Exhibit (IEE) in the insurerís annual statement filed with the Department; and
*[v.]**5.* Effects of all applicable law changes shall be reflected, including but not limited to, the Automobile Insurance Cost Reduction Act (AICRA). *[The impact of AICRA shall reflect the percentages by coverage mandated by statute and be applied to all policies written prior to March 22, 1999, not all losses occurring prior to March 22, 1999. For example, a policy written on March 1, 1999 will not be subject to AICRA until renewal on March 1, 2000.
vi. For purposes of (a)2v, above, the statutory percentages shall be:
BI -22 percent;
PD - 3 percent;
CSL -12 percent;
PIP -27 percent;
UM -12 percent;
COMP - 3 percent;
COLL - 9 percent.
(1) BI assumes -24 percent for verbal threshold and zero percent for no limitation on law suit option. UM and CSL assumed a 50/50 split of BI/PD;]*
*6. Filers may exclude catastrophe losses from the COMP data and include a load based either on the selected factor from ISO's last approved private passenger automobile filing in New Jersey or derive a factor from at least 10 years of the filer's internal New Jersey catastrophe COMP data.*
*[3. Permissible loss and LAE ratios (separately for liability and physical damage) shall be determined by:
i. Subtracting the sum of (a)3ii below from one (1.00).
*(d) Expenses shall be determined by group of coverages (liability versus physical damage) from the total of:*
*[(1)]**1.* Three year average of commissions*[,]* *and brokerage expense ratios based on the NJ page 14/15 of the insurer's latest annual statement filed with the Department and calculated as ratios to NJ WP;
2. Three-year average of* general and other acquisition expense ratios, based on the countrywide IEE *of the insurer's latest annual statement filed with the Department and calculated as ratios to EP;
3. The sum of (d)1 and 2 above are* *[and]* subject to the expense limitations found in N.J.A.C.11:3-16.10(b)6 *and shall not include any of the expenses listed in N.J.A.C. 11:3-16.10(b)8*. Current expense limitations by type of insurer will be posted annually on the Departmentís website *[www:dobi.state.nj.us. Commissions and other acquisition expenses shall be calculated as ratios to written premiums; general expenses shall be calculated as ratios to earned premiums; plus]* *www.njdobi.org, by group of coverages (liability versus physical damage).*
*[(2)]**4.* Three year average of taxes, licenses and fees *[; plus]* *ratios, based on the NJ page 14/15 of the insurer's latest annual statement filed with the Department and calculated as ratios to NJ WP;*
*[(3)]**5.* The most recent Unsatisfied Claim and Judgment Fund assessment for liability coverages; plus
*[(4)]**6.* Profit and contingency provisions reflecting investment income computed pursuant to the "Clifford Formula" in N.J.A.C. 11:3-16.10(a).
*[iii. The expenses listed in (a)3ii above shall not include any of those expenses listed in N.J.A.C. 11:3-16.10(b)8;]*
*7. Total capped expenses shall be determined from the sum of (d)3 through 6 above.
(e) Permissible loss and LAE ratios by group of coverages (liability versus physical damage) shall be determined by subtracting total capped expenses, determined in (d)7 above from 1.00.*
*[4.]**(f)* Credibility shall be determined by:
*1. If the filer submits indications on a total limit basis, the full credibility standard shall be based on 4,000 claims for BI, PD, CSL and PACK. If the filer submits indications on a basic limits basis, the full credibility standard shall be based on 3,000 claims for BI, PD, CSL and PACK. The full credibility standard for PIP, COMP and COLL shall be based on 3000 claims.*
*[i. Classical credibility by coverage using the square-root rule:
(1) Calculate]**2. Alternatively the filer may support different full credibility standards than those in (f)1 above by calculating* the mean, variance and coefficient of variation from the companyís internal size-of-loss distributions by coverage and then adjust the 1,082 claims frequency standard by the appropriate factors by coverage to reflect variation in severity. The severity adjustment shall be made and the filer shall provide all data together with methodology. *[In the event this detail is not available, the filer shall certify that the data is not available, and thereafter shall use a full-credibility standard of 4,000 claims per coverage.]*
*3. The filer shall apply the classical credibility procedure using the square-root rule to the full credibility standards obtained in either (f)1 or 2 above to determine the credibility of each coverage. The minimum credibility assigned to any coverage or combination of coverages (CSL or PACK) shall be 50 percent.*
*[ii.]**(g)* The complement of credibility shall be assigned to the loss ratio trend*s* by coverage, trended from the last effective date to the proposed effective date *using premium and loss trends by coverage determined in (b)3 and (c)3 above respectively*; and
*[5.]**(h)* The indicated rate change*s* by coverage and overall *[are]* *shall be* calculated as follows:
*[i.]**1.* The *[three]* *all* year *projected ultimate* loss and LAE *[ratios are the result of (a)2 above divided by (a)1above, using calendar/accident year weights of 20 percent (earliest year), 30 percent and 50 percent (most recent year)]* *by coverage determined in (c) above divided by the all year projected premium by coverage determined in (b) above*.
*[ii.]**2.* The *raw* indication*s* by coverage *[is the result of (a)5i above divided by (a)3]**shall be calculated by the all year loss and LAE ratios determined in (h)1 above divided by the permissible loss and LAE ratios determined in (e) above*.
*[iii.]**3.* The credibility-weighted indication*s* by coverage *[is the result of]**shall be determined by*:
*[Subparagraph (a) 5ii]* 1. Paragraph (h)2* above, raw indication *[by coverage]*;
*[(2)]**ii.* Multiplied by *[(a)4i]* *(f)3* above (credibility);
*[(3)]**iii.* Plus (1 + *[(a)4ii]**(g)* above (loss ratio trend);
*[(4)]**iv.* Multiplied by (1 Ė *[(a)4i]**(f)3* above) (complement of credibility).
*[iv.]**4.*The overall indication results from the credibility-weighted indications by coverage, *[(a)5iii]* *determined in (h)3* above, weighted by the latest *[available annual written]* *year's on-level projected earned* premium by coverage *determined in (b) above*.
*[(c)]**(i)* If only uniform statewide base rate changes by coverage are proposed, the information in (a) *through (h)* above is sufficient. If proposed base rate changes vary by territory, the filer shall provide credibility-weighted territorial indications by coverage, in addition to (a) *through (h)* above.
2. Territorial indications by coverage shall be based on a full-credibility standard of 3,000 claims per territory, with the complement of credibility applied to the *Statewide indications by coverage determined in (h)3 above or to the* current territorial rate/relativity.
*(j) Filers that include changes to expense fees shall provide the standard, fixed expense fee calculation. For changes to deductible factors, classification factors, increased limit factors, discounts and credits, filers shall provide three year relative loss ratios to justify the proposed change(s).*
*(k) All filers shall use the Department's methodology set forth in (a) through (j) above. The filer can submit an alternate methodology or use different data to support its filing provided that it is clearly labeled as such and is submitted in addition to the methodology in (a) through (j) above. The Department's review of any alternate methodology or data submission is not governed by the time frames in N.J.A.C. 11:3-16B.6(d).*
11:3-16B.5 Limitation on filer's rate request
*(d) A filer may not have more than one rate-change request pursuant to this subchapter approved in any 12-month period.*
11:3-16B.6 Review; general principles; actions
(a) If the Commissioner determines that the filing will not produce rates *[which]* *that* are excessive, are inadequate for the safety and soundness of the insurer, or are unfairly discriminatory between *[the]* risks in this State involving substantially the same hazards and expense elements, then *[the law requires that]* the Commissioner shall approve the filing.
(b) (No change from proposal.)
(c) After a filing has been submitted in accordance with (b) above, the Department, within 20 days of receipt, shall conduct a preliminary review to determine if it is in compliance with N.J.S.A. 17:29A-46.6 and this subchapter. If the filing is in compliance, it shall be deemed complete by the Department. If a filing is not in compliance, *[it shall be rejected]**the filer will be notified of deficiencies in the filing within 20 days of receipt*. If *[a filing is not rejected]* *the filer is not notified of deficiencies* within 20 days of receipt, it shall be deemed complete *and is under review*.
(d) *[If a filing is not rejected, the]**The* Commissioner shall render a decision within 45 days of receipt of the filing.
(e) The Commissioner, pursuant to (a) above and N.J.S.A. 17:29A-46.6d shall render one of the following determinations on the filing:
1. Approve the *rate change* filing *[request]* *as filed*;
2. Disapprove the *rate change* filing *[request]*; or
3. Approve *[under different terms or conditions]* *a modified rate change filing*.
(f) In the event additional time is needed to act on a complete *rate change* filing, the Department may seek an extension of time from the Commissioner, which shall not exceed 60 days from receipt of the filing.
(g) (No change from proposal.)
(h) If a filer has a *[previously filed]* *pending* application for prior approval rate change submitted in accordance with N.J.A.C. 11:3-16.6 *[pending]*, *[the Department may seek an order from the Commissioner suspending the commencement of the time period set forth in (d) above for consideration of the expedited filing]**the filer shall promptly amend such pending filing to reflect any rate change approved in accordance with this subchapter*.
(i) If a filer has a *[previously filed]* *pending* application for an expedited rate change *[pending]* pursuant to this subchapter, *[the Department may seek an order from the Commissioner suspending the time periods for the disposition of an rate applications made pursuant to]* *the filer shall promptly amend such pending filing to reflect any rate change approved in accordance with* N.J.A.C. 11:3-16.6.
(1) Cover letter
(2) Manual pages
(4) Filer's name
(5) Effective date for new and renewal policies
(6) Number of exposures affected
(7) Rating examples
(8) Average premium, current and proposed by coverage
(9) Calculations showing proposed rates are in compliance with N.J.S.A. 17:29A-36
(10) Calculation of projected earned premium
(11) Derivation of on-level factors and submission of a rate history
(12) Derivation of annual premium trends (if submitting company data) or annual selections (if using ISO factors) and derivation of the premium trend period
(13) Calculation of ultimate loss and LAE
(14) Derivation of loss development factors
(15) Derivation of annual loss trends (if submitting Fast Track data) or annual selections (if using ISO factors) and derivation of the loss trend period
(16) Derivation of unallocated loss adjustment expense factors
(17) Derivation of factors to reflect applicable law changes
(18) Derivation of the full-credibility percentages and standards (if submitting company data)
(19) Derivation of the complements of credibility, ie. the loss ratio trend factors
(20) Calculation of permissible loss and LAE ratios
(21) Derivation of expense ratios
(22) Derivation of profit and contingency provisions reflecting investment income
(23) Credibility-weighted indications by coverage and overall
(24) Territorial indications by coverage (if not proposing uniform base rate changes by territory)
(24) Completed N.J.A.C. 11:3-16 Appendix - Exhibit E.
Donald Bryan, Acting Commissioner