DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Expedited Rate Filings
Calculations for Private Passenger Automobile Insurance Rate Changes
Proposed New Rules: N.J.A.C. 11:3-16B
Authorized By: Karen L. Suter, Commissioner Department of Banking and Insurance
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
Proposal Number: PRN 2001-324
Submit comments by September 5, 2001 to:
The agency proposal follows:
N.J.S.A. 17:29A-46.1 et seq. (the "Act") substantially revises numerous aspects of the statutory law governing private passenger automobile insurance in New Jersey. The Act, among other things, eliminates the automatic "flex rate" increases that were previously permitted by N.J.S.A. 17:29A-44 and N.J.A.C 11:3-16A and, under N.J.S.A. 17:29A-46.1 et seq. permits filers to seek rating system changes pursuant to an expedited prior approval process. The Act specifically provides for an expedited process by which insurers can obtain an overall change (up or down) of no more than three percent and a single coverage change of no more (up or down) than five percent in the course of a 12 month period. The proposed new rules will implement these aspects of the Act.
N.J.S.A. 17:29A-46.6d of the Act mandates that the Commissioner render a decision on an expedited filing no more than 45 days after receipt, unless the time is extended by the Commissioner, in which case a decision shall be rendered no later than 60 days after receipt of the filing. Furthermore, expedited filings shall be deemed to be complete, no more than 20 days after the Department has received the filing, unless rejected for incompleteness within 20 days of receipt.
The Departmental review process is also limited by the Act. Specifically, N.J.S.A. 17:29A-46.6c provides that if the Commissioner finds that the filing will not produce rates which are excessive, are inadequate for the safety and soundness of the insurer, or are unfairly discriminatory between risks in the State involving substantially the same hazards and expense elements, then the Act requires that the Commissioner approve the filing.
In accordance with N.J.S.A. 17:29A-46.7, the Department is charged with the responsibility of promulgating rules to implement the provisions of the Act. When the Chapter 3 readoption took place on January 4, 2001, N.J.A.C. 11:3-16A, Flex Rate Percentage Calculations for Private Passenger Automobile Insurance, was repealed. See 33 N.J.R. 573(a). Therefore, the proposed new subchapter, N.J.A.C. 11:3-16B, is necessary to permit the filing and review of requests for expedited rate changes.
Proposed N.J.A.C. 11:3-16B.1 establishes the scope and purpose of the rules. This subchapter shall only apply to filings for base rate changes by coverage and/or by territory. It shall not apply to filings that exceed the three percent overall cap; exceed the five percent cap by coverage; exceed the five percent cap by territory; change classification factors; or change tier rating factors.
Proposed N.J.A.C. 11:3-16B.2 contains the definition of terms that are used in the proposed rules.
Proposed N.J.A.C. 11:3-16B.3 lists the documentation necessary to constitute a complete filing. The requirements are limited to documents, information and exhibits that insurers should have reasonably available. The Department has endeavored to limit the quantity of documentation so as to simplify filing requirements consistent with statutory intent while at the same time allowing it to receive such documentation as is needed to evaluate whether rates will be excessive, inadequate or discriminatory. When not adversely impacting the prompt review of a filing, the Department and the filer may clarify issues by supplemental questions and answers.
Proposed N.J.A.C. 11:3-16B.4 contains the calculations used to establish the need for any expedited rate change. Once again, the data and the computations should be readily available to the filer or its rating organization.
Proposed N.J.A.C. 11:3-16B.5 contains limitations on the filerís rate request. These include the three percent overall limit and a per coverage/per territory limit of five percent. Subsection (c) will permit filers to adjust coverage and territory base rates by five percent, as long as the overall change does not exceed three percent (up or down) and does not exceed the overall rate change that is indicated. Thus, insurers and rating organizations will be permitted to use this process equitably to balance individual coverages and territories pursuant to N.J.S.A. 17:33B-31.
Proposed N.J.A.C. 11:3-16B.6 establishes the Departmental review provided for in the Act. Subsection (a) identifies the scope of Departmental review on an expedited rate filing. Subsection (b) sets forth, specifically or by reference, the documentation that must accompany a filing when submitted, and subsection (c) provides that filings shall be deemed complete 20 days after receipt, unless rejected by the Department for not complying with these rules.
Proposed N.J.A.C.11:3-16B.6(d), (e) and (f) contain the statutory time limits for Department review and require the Commissionerís approval, disapproval or modification within 45 days of the filing being received; otherwise it is deemed approved. Only one 15-day extension of time may be granted with the approval of the Commissioner.
Proposed N.J.A.C. 11:3-16B.6(g) contains the filer's right of review of an adverse Departmental decision consistent with the provisions of the Administrative Procedures Act, N.J.S.A. 52:14B-1 et seq. Also, subsection (h) and (i) contain provisions for handling situations where a filer has a prior rate filing pending.
The primary social impact of these new rules will be to lessen the burden and time involved in the Departmental review and approval of certain minor rate changes. The expressed intent of the Act is to provide an expedited process for the filing and review of proposed minor base rate alterations in an insurer's rating system. Under these rules, a filer will be permitted to assemble the information referenced in the proposed rules and attach a certification from a qualified actuary that the request is consistent with generally accepted rate making principles of the actuarial profession contains the necessary material, data and documentation necessary to the filing, and a statement that the requested rate change is supported by the filing. A filing is deemed complete when it is submitted to the Department with such a certification and is not rejected for incompleteness within the 20-day period. The Commissioner has a period of 45 days from the date of receipt to act on the request. If the Commissioner does not modify or disapprove the request within the required period, the filing is deemed approved. Thus, the expedited process established by these rules achieves the beneficial social impact of timely action on an insurerís rate changes.
The interests of the public are also protected. Only one expedited rate revision per 12-month period may be approved, and cannot exceed an overall change of three percent or the overall rate change that is indicated, whichever is lower. In addition, the proposed rules also apply the "Clifford Formula" profit provisions established in N.J.A.C. 11:3-16.10(a).
The proposed new rules will affect the Department and insurers. Consistent with the intent of the Act, both should experience a reduction in the time and expense associated with applications for rate changes. The expedited process provides a timely and efficient review of requests for minor adjustments.
The Department notes that the proposed rules will permit rating organizations to file requests for approval of minor base rate changes using the expedited process.
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.
N.J.S.A. 52:14B-4(a)(2) requires that all notices of a proposal to amend rules include a "jobs impact statement which shall include an assessment of the number of jobs to be generated or lost if the proposed rule takes effect."
In accordance with this statutory obligation, the Department has conducted a review of the foreseeable impact that the adoption of these rules will have on jobs in the State of New Jersey. No demographic, scientific or work force development studies are available. However, the Department does not believe that these rules will have a negative impact on job creation. To the extent that the proposed amendments will allow the Department and insurers to expedite requests for rate review, the increased efficiency may encourage new insurers to enter the market place, thus creating new jobs.
Agriculture Industry Impact
The Department anticipates that the proposed new rules will have no impact on the State agriculture industry.
Regulatory Flexibility Analysis
Pursuant to the Regulatory Flexibility Act, at N.J.S.A. 52:14B-17, a "small business" is any business resident in this State that employs fewer than 100 employees; is independently owned and operated; and is not dominant in its field. A few New Jersey automobile insurers meet this definition. The Department observes that in most cases the proposed new rules are not imposing any new recordkeeping, reporting or compliance obligations but are merely streamlining and expediting a process where all insurers, large and small, can seek yearly review of their rates. All private passenger automobile insurers will be required to incur some costs associated with the exercise of their right to seek a yearly review under this expedited process. This expense will involve the assembly of documentary evidence necessary to support the filing as well as the review and certification by a professional actuary. The Department does not believe that these requirements will impose any undue burden on small businesses in that they are not treated any differently than any other insurer.
The proposed new rules implement N.J.S.A. 17:29A-46.6 and 46.7 with respect to the establishment of the expedited rate filing process to be used by private passenger automobile insurers. These statutes provide no different reporting or compliance requirements based on an insurer's size. For this reason, and to ensure consistency in the review, approval and application of underwriting rules and rating systems to insurers, the proposed new rules provide no differentiation in compliance requirements based on insurer's size.
Full text of the proposed new rules follows:
SUBCHAPTER 16B. EXPEDITED PROCESS; CALCULATIONS FOR PRIVATE
PASSENGER AUTOMOBILE INSURANCE RATE CHANGES
11:3-16B.1 Purpose and scope
(a) The purpose of this subchapter is to set forth the expedited process for a private passenger automobile insurer or rating organization to file changes to its rating system as permitted by N.J.S.A. 17:29A-46.6.
(b) This subchapter shall apply to rates filed by:
1. All insurers and rating organizations writing or transacting private passenger automobile insurance in the voluntary market in this State; and
2. The New Jersey Personal Automobile Insurance Plan.
(c) These rules shall apply only to base rate changes by coverage and to territorial base rate changes 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.
"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.
"Personal Automobile Insurance Plan" or "PAIP" means the New Jersey Personal Automobile Insurance Plan established by N.J.A.C. 11:3-2.
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 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 rates 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; and
2. A checklist that sets forth the information in the 16B Checklist in the subchapter Appendix incorporated herein by reference;
3. An exhibit, supported by an actuarial certification, that illustrates that the new rates are within the ranges permitted by N.J.S.A. 17:29A-36 and 29A-46.6 (e).
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
5. Completed rating examples using the examples set forth in N.J.A.C. 11:3-19A-3, which shows the proposed premium amounts.
(b) The filer may supplement a complete filing in response to questions from the Department about matters that require clarification or additional explanation, provided that the prompt review of the filing within the timeframes set forth in this subchapter is not adversely affected.
11:3-16B.4 Expedited process calculations for private passenger automobile insurance
(a) Filers shall provide the following information regarding New Jersey premium, exposure, loss and expense data:
1. The projected earned premium shall be determined by:
i. The latest available three calendar years of New Jersey (NJ) earned premium by coverage;
ii. On-level factors by coverage, based on company specific historical NJ rate changes; and
iii. 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) 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;
2. Ultimate loss and loss adjustment expense ("LAE") shall be determined by:
i. The latest available three calendar/accident years of NJ incurred loss and defense/cost containment expense ("Defense"), by coverage, either combined (loss and Defense) or developed separately;
ii. New Jersey loss development factors (LDFs) by coverage, either combined (loss and Defense) or separately. The selected age-to-age factors shall be based on the latest seven-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. BI, CSL, UM and PIP LDFs shall be developed to 87 months, with a five percent tail factor from 87 months to ultimate. PD, COMP and COLL LDFs shall be developed out to 54 months, with no subsequent tail factor;
iii. 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) If supplying Fast Track trend factors developed by the company, the filer shall provide all data and calculations. Use of ISO information is applicable only to filers that subscribe to ISO;
iv. Adjusting and other claims related expense ratio ("Adjusting") shall be determined from the latest three year average of incurred Adjusting to incurred loss and incurred Defense data from the Countrywide Insurance Expense Exhibit (IEE) in the insurerís annual statement filed with the Department; and
v. 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;
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).
ii. The total of:
(1) Three year average of commissions, general and other acquisition expense ratios, based on the countrywide IEE and subject to the expense limitations found in N.J.A.C.11:3-16.10(b)6. 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
(2) Three year average of taxes, licenses and fees; plus
(3) The most recent Unsatisfied Claim and Judgement Fund assessment for liability coverages; plus
(4) 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;
4. Credibility shall be determined by:
i. Classical credibility by coverage using the square-root rule:
(1) Calculate 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.
ii. The complement of credibility shall be assigned to the loss ratio trend by coverage, trended from the last effective date to the proposed effective date; and
5. The indicated rate change by coverage and overall are calculated as follows:
i. The three year loss and LAE ratios are the result of (a)2 above divided by (a)1 above, using calendar/accident year weights of 20 percent (earliest year), 30 percent and 50 percent (most recent year).
ii. The indication by coverage is the result of (a)5i above divided by (a)3.
iii. The credibility-weighted indication by coverage is the result of:
(1) Subparagraph (a) 5ii above, raw indication by coverage;
(2) Multiplied by (a)4i, above (credibility);
(3) Plus (1 + (a)4ii), above (loss ratio trend);
(4) Multiplied by (1 - (a)4i), above (complement of credibility).
iv. The overall indication results from the credibility-weighted indications by coverage, (a)5iii above, weighted by the latest available annual written premium by coverage.
(b) If only uniform statewide base rate changes by coverage are proposed, the information in (a) 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) above.
1. Territorial indications shall be based on the same three years of data as the overall indications above and shall be indexed to the indications by coverage, derived in (b)5iii 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 current territorial rate/relativity.
11:16B.5 Limitation on filer's rate request
(a) If the overall indicated change as determined in N.J.A.C. 11:3-16B.3(b) is an increase of three percent or more, the filer shall request an overall increase of no more than three percent.
(b) If the overall indicated change as determined by N.J.A.C. 11:3-16B.3(b) is less than three percent, the filer shall request no more than the overall rate change that is indicated.
(c) Notwithstanding the limitation of (a) and (b) above, filers shall be permitted to seek a single coverage and territory base rate increase of up to five percent provided the rate change is indicated by coverage and the overall increase does not exceed three percent.
11:3-16B.6 Review; general principles; actions
(a) If the Commissioner determines that the filing will not produce rates which 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) A filing will be deemed submitted when it is received by the Departmentís Property and Casualty Office and is accompanied by:
1. All the documents, exhibits and calculations required by this subchapter, and
2. A certification of a qualified actuary, specifying that the filing is complete and complies with this subchapter.
(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. If a filing is not rejected within 20 days of receipt, it shall be deemed complete.
(d) If a filing is not rejected, 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 filing request;
2. Disapprove the filing request; or
3. Approve under different terms or conditions.
(f) In the event additional time is needed to act on a complete filing, the Department may seek an extension of time from the Commissioner, which shall not exceed 60 days from receipt of the filing.
(g) A disapproval or modification of the filing by the Commissioner shall be considered a final agency decision in accordance with the Administrative Procedures Act, N.J.S.A. 52:14B-1 et seq.
(h) If a filer has a previously filed 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.
(i) If a filer has a previously filed 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 N.J.A.C. 11:3-16.6.
(1) Cover letter
(2) Manual pages
(4) Filer's name
(5) Efffective 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.