IIABCal Urges CDI to Let Insurers Use Rate Models (7/13/23)

IIABCal Urges CDI to Let Insurers Use Rate Models


IIABCal urged the California Department of Insurance (CDI) at a regulatory workshop on July 13 to allow insurers to use catastrophic loss rate models—instead of limiting insurers solely to their own historic losses—in rate-making applications.  Here is IIABCal’s written testimony.


California is one of the only states in the country that requires insurance companies to base future rates solely on their own historic loss experience, not what they anticipate their losses will be.  Such reliance may be rational when losses are predictable and stable, but less so when unexpected, unpredictable and severe losses suddenly emerge, as with the catastrophic wildfires that have plagued California and other western states in the last seven years.


CDI held the workshop as an “information gathering” session that could conceivably lead to proposed regulations, notwithstanding past outspoken criticism of rate modeling by Insurance Commissioner Ricardo Lara and his top deputies.


IIABCal General Counsel Steve Young minced no words in written testimony submitted in advance of the workshop.


The Worst Availability Crisis Ever


“Our members are facing the most severe availability crisis they have ever experienced.  Independent agents and brokers are desperate to see a healthy, competitive insurance marketplace restored, and immediate action is required,” Young said.  “Insurers need adequate rates and timely approval of their rate requests—and this Department of Insurance is providing neither.”


Young noted that the underlying factors driving the emergence of  wildfire losses—global warming, forest mismanagement, utility negligence, population and building growth in WUI zones, inflationary and supply-chain pressures, inadequate building codes—are present in almost every Western state, yet only California is facing an ever-worsening crisis in property insurance availability.


Lara has exacerbated this crisis


“Commissioner Lara has exacerbated this crisis by promoting rate suppression over rate adequacy,” Young said, accusing CDI of ignoring its obligation under California Insurance Code Section 1861.05, to prevent insurers from utilizing inadequate rates.  


Late last year, IIABCal utilized its Legal Defense Fund to retain a highly respected national law firm, and actuarial experts familiar with California prior approval regulations, to develop a plan to restore the private voluntary insurance market, and encourage insurers to resume writing and renewing property risks.


The IIABCal Plan—which the Commissioner has the legal authority to implement with no new legislation required—has four components, in descending order of importance:


1) Joining the 49 other states that recognize insurers’ reinsurance costs;


2) Adjusting the cost-of-capital factor for wildfire risks retained, rather than ceded to reinsurers;


3) Allowing insurers to use prospective rate models; and


4) Requiring the Department to strictly observe, rather than pressure insurers to waive, the 180-day deemer provision in Insurance Code Section 1861.05(c).


IIABCal has provided CDI a detailed roadmap


On the subject of rate models, IIABCal provided CDI with detailed proposed regulatory language that would allow insurers to use catastrophic rate models, yet preserve the Department’s ability to scrutinize the actuarial credibility of those models and their impact on rates.


One barrier to the use of wildfire models in California has been that state law requires all information provided to the commissioner pursuant to Prop. 103 to be available for public inspection. But rate modeling companies have an obvious need to protect their proprietary technology from disclosure to competitors.


The workshop invited participants to explain how those competing considerations—permitting public inspection of rate filings, while protecting proprietary technology—could be reconciled.


Rate Models aren’t subject to Prop. 103 filing requirements


IIABCal’s testimony offered the Commissioner several suggestions on that point.


“We believe [the public inspection provisions of Prop. 103] can reasonably be construed to exclude confidential and proprietary information developed and filed by rate modeling vendors,” Young wrote.  “Nothing [in Prop. 103] requires rate modeling vendors to file any information with the Commissioner.  New regulations could readily be promulgated requiring third-party risk modeling vendors to obtain approval of the Department of Insurance before making their products or services available to California insurers; such information would not be predicated on Prop. 103, and would therefore not be subject to the public inspection provisions.”


IIABCal also testified that the Casualty Actuarial Society (CAS) Actuarial Standards of Practice (ASOP) require disclosure when an actuary uses a catastrophe model in ratemaking, including how the model was used in the analysis and details about the model, including its components, inputs, and outputs—which by itself could satisfy the public inspection requirement.


Finally, IIABCal cited creation in Florida of an independent panel that carefully reviews hurricane rate models, and suggested a third alternative would be to create a similar panel of experts on wildfire loss in California.


Immediate relief is needed


Young stressed IIABCal’s belief that immediate relief is needed.


“IIABCal and its members are willing, and eager, to work with Commissioner Lara and all interested parties to develop solutions to current marketplace difficulties.  But immediate action is needed.  Now—not in the 18-24 months it would take the Department of Insurance to promulgate new regulations,” he said.