Messrs. Ned Price and Durwood Manford Opinion No. M -446 Members, State Board of Insurance. Insurance Building Austin, Texas Re: Investment Income as a Factor in Computing Premium Rates for AutoGentlemen: mobile Insurance

You have recently requested an opinion ofthis office on the following questions:’

1. Is the Board authorized or required by law to consider or include in its automobile rate-making formula or premiums the overall countrywide investment income of the insurers from all sources in prescribing and promulgating rates ofpremium? 

### 2. Is the Board authorized or required by law to consider or

include in its automobile rate-making formula or premiums the overall investment income ofinsurers attributable to their business done in Texas inprescribing and promulgating rates ofpremium? 

### 3. Is the Board authorized or required by law to consider or

include in its automobile insurance rate-making formula or premiums the overall countrywide investment income ofthe insurers attributable to their automobile insurance premiums in prescribing and promulgating rates ofpremium? 

### 4. Is the Board authorized or required by law to consider or

include in its automobile insurance rate-making formula or premiums the investment income ofthe insurers attributable to their Texas automobile insurance premiums?



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Article 5.01, Texas Insurance Code provides, in part, as follows:

‘1.
. . The Board shall have the sole and exclusive power and authority, and it shall be its duty to determine, fix, prescribe, and promulgate just, reasonable and adequate rates ofpremiums tobe charged and collected by all insurers writing any form ofinsurance on motor vehicles inthis State, including fleet or other rating plans designed to discourage losses from fire and theft and similar hazards and any rating plans designed to encourage the prevention ofaccidents. Inpromulgating any such rating plans the Board shall give due consideration to the peculiar hazards and experience ofindividual risks, past and prospective, within and outside the State and to all other relevant factors, within and outside the State. The Board shall have the authority also to alter or amend any and all of such rates ofpremiums so fixed and determined and adopted by it, and to raise or lower the same or any part thereof. ” Article 5.03, Texas Insurance Code provides as follows:

“On and after the filing and effective date of such classification of such risks and rates, no such insurer shall issue or renew any such insurance at premium rates which are greater or less than, or different from, those approved by the Board as just, reasonable, and adequate for the risk towhich they respectively apply, and not confiscatory as to any class of insurance carriers authorized by law towrite such insurance. ” Article 5.04, Texas Insurance Code reads:

“To insure the adequacy and reasonableness of rates the Board may take into consideration past and prospective experience, within and outside the State, and all other relevant factors, within and outside the State, gathered from aterritory sufficiently broad to include the varying conditions ofthe risks involved and the hazards and liabilities assumed, and over aperiod sufficiently long to insure

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that the rates determined therefrom shall bejust, reasonable and adequate, and to that end the Board may consult any rate making organization or association that may now or hereafter exist. ” The basic consideration onwhich all four questions here presented are based is whether the State Board ofInsurance is either authorized or required to consider in its automobile rate making formula various types of investment income realized by the insurers from some or all oftheir investments. Because ofthe nature ofour answers to these questions they all may be considered together.

Review ofthe above quoted sections ofthe Insurance Code makes it readily apparent that no specific reference is made to either the inclusion or exclusion of investment income ofthe insurers inthe Board’s establish - ment ofadequate and reasonable rates. It is clear, however, from the language of Article 5.01 that the Board shall have the sole and exclusive power and authority to prescribe just, reasonable andadequate rates of premiums tobe charged for automobile insurance in Texas. These are the general guidelines the Board is to follow in establishing the rates. Article 5.03 provides that such rates shall not be confiscatory as to any class of insurance carriers.

There seems to be noquestion that rate making is alegislative function, and in this case is tobe performed by anadministrative body, the State Board ofInsurance. Brown &Root v. Traders &General Insurance co. ) 135S.W. 2d 534 (Tex. Civ. App., 1940, error dism., judgm. car. ); Gsociated Indemnity Corp. v. Oil Well Drilling Co., 258 S.W. 2d 523 (Tex. Civ. App. 1953, affirmed, 153Tex. 153, 264S.W.2d 697. )

In the latter decision the Dallas Court ofCivil Appeals stated:

“It cannot be disputed that the legislature originally intended to leave the details ofrate making to,a rate-making body, such as the Board
. . .

“
. . .

“The Board’s rate-making powers are legislative in character; hence its orders fixing rates must be sub-

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jetted to the same tests under the ‘equal protection’ clause as an enactment ofthe Legislature itself. ‘I The Insurance Code was first enacted in 1927. Articles 5.01 and 5.04were amended in 1953by H.B. No. 32, Acts ofthe 53rd Legislature, Regular Session, At that time the words “and all other relevant factors, I’ among other things, were added to the Articles.

The words “all relevant factors” were by H.B. No. 32added to Article 5.01inthe second sentence ofthe second paragraph ofthat Article. This sentence is as follows:

“In promulgating any such rating plans the Board shall give due consideration to the peculiar hazards and experiences ofthe individual insurers, past and prospective, within and outside the state and to all other relevant factors, within and outside the state. ‘1 Itthus appears that the words “all relevant factors” as are used inArticle 5.01apply only to rating plans and not to the general automobile insurance premium formula.

As previously observed, the words “all relevant factors” were also added, among other things, to Article 5.04 in 1953. The Legislature has directed that the Board may take into consideration to insure the adequacy and reasonableness of rates. past and prospective experience within and outside the state and all other relevant factors. Therefore, it is apparent that the Board has wide discretion inits determination ofwhat are all other relevant factors and infact may or may not include in its consideration such factors. InVirginia, the Supreme Court ofthat state, in reviewing a rate set by the rate fixing board, concluded from the evidence before it that income from investment ofthe loss reserve, as well as from investment of the unearned premium reserve, was a relevant, factor infixing a reasonable margin for underwriting profit and contingencies. Virginia State AFL-CIO v. Commonwealth ofVirginia, et al, 167S.E. Zd 322 (Va. Sup. 1969).

We are ofthe opinion, therefore, that our Legislature has delegated to the State Board of Insurance the legislative function ofrate making. By Articles 5.01and 5.03it has directed the Board to fix just, reasonable and

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adequate rates which are non-confiscatory. By Article 5.04the Legislature has stated that inarriving atjust, reasonable and adequate rates which are not confiscatory the Board is authorized to consider, among other things, all other relevant factors. Ifthe Board determines afactor to be relevant for consideration inarriving at ajust, reasonable and adequate rate which is not confiscatory, it has the authority to consider such factor. But this is the sole and exclusive power and authority ofthe Board byvirtue ofits legislative rate-making authority. It is not for this office to determine what is a relevant factor for the Board’s consideration in the exercise ofits legislative powers. Section 1, Article II, Constitution of Texas. SUMMARY

The fixing ofautomobile insurance rates by the State Board ofInsurance is alegislative function, delegated to it by the Legislature, and it has the sole power and exclusive authority to determine afair and just rate, and to give due consideration to such factors as they may determine, from the evidence before them, tobe relevant. Youfiery truly,

Attobey General ofTexas Prepared by Sam Kelley Assistant Attorney General APPROVED: OPINION COMMITTEE Kerns Taylor, Chairman George Kelton, Vice-Chairman W. 0. Shultz Harold Kennedy John Grace Alfred Walker W.V. Geppert Staff Legal Assistant Hawthorne Phillips Executive Assistant -

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