Source: http://www.tdi.texas.gov/orders/co-00-0214.html
Timestamp: 2018-08-15 14:50:49
Document Index: 233810877

Matched Legal Cases: ['§ 40', 'Art. 1', '§ 40', 'Art. 1', 'Art. 1', '§ 40', 'Art. 1', '§ 40', 'Art. 1', '§ 3', '§3', '§8', '§3', '§3', '§8', '§8', '§5', '§13', '§8', '§3', 'art. 3', '§ 40', 'Art. 1', '§ 40', 'Art. 1', '§3', '§8', 'art. 3', '§8', 'art. 3', 'art. 3', 'art. 3']

Order Correcting CO-99-1481 Nunc Pro Tunc
Date: February 23, 2000 Subject Considered:
PRESUMPTIVE PREMIUM RATES FOR CREDIT LIFE
AND CREDIT ACCIDENT AND HEALTH INSURANCE
DOCKET NO. 454-98-1807.G
ORDER CORRECTING COMMISSIONER'S ORDER NO. 99-1481
Upon the motion of the Commissioner of Insurance on this day came on for consideration the amendment nunc pro tunc of Commissioner's Order No. 99-1481 entitled "Presumptive Premium Rates for Credit Life and Credit Accident and Health Insurance" as of the date of entry thereof.
The Commissioner, after due consideration finds and determines that the instructions on page i of Appendix C for determining credit disability presumptive rates in Commissioner's Order No. 99-1481, contained erroneous references to "Table D" which should be corrected to reference "Table C." The specific plans which contained the erroneous reference of "Table D" on page i of Appendix C were Plans 10 through 14 and Plans 22 through 25. The specific corrections are as follows:
10 Single Premium 14-day Retroactive Multiply rate from Table C times Discount Factor*
11 Single Premium 30-day Retroactive Multiply rate from Table C times Discount Factor*
12 Single Premium 14-day Non-Retroactive Multiply rate from Table C times Discount Factor *
13 Single Premium 30-day Non-Retroactive Multiply rate from Table C times Discount Factor *
14 Single Premium 90-day Non-Retroactive $.13 /year/$100 initial indebtedness times Discount Factor *
16 Outstanding Balance Revolving 14-day Retroactive $2.00 per month per $1000 of outstanding insured indebtedness
17 Outstanding Balance Revolving 30-day Retroactive $1.48 per month per $1000 of outstanding insured indebtedness
18 Outstanding Balance Revolving 14-day Non-Retroactive $1.74 per month per $1000 of outstanding insured indebtedness
19 Outstanding Balance Revolving 30-day Non-Retroactive $1.30 per month per $1000 of outstanding insured indebtedness
22 Outstanding Balance Other 14-day Retroactive Multiply applicable Table C rate by Conversion Formula **
23 Outstanding Balance Other 30-day Retroactive Multiply applicable Table C rate by Conversion Formula**
24 Outstanding Balance Other 14-day Non-Retroactive Multiply applicable Table C rate by Conversion Formula**
25 Outstanding Balance Other 30-day Non-Retroactive Multiply applicable Table C rate by Conversion Formula**
26 Outstanding Balance Other 90-day Non-Retroactive Multiply Plan 14 SP without discount by Conversion Formula**
* Single premium rates for plans 10 through 14 must be multiplied by the discount factor which is restated as follows:
Where n = The term of the insurance coverage in months
** Conversion Formula Is As Follows:
Where n = the term of the insurance coverage in months.
Coverage cannot be less than 6 months
IT IS THEREFORE, ORDERED by the Commissioner of Insurance that the Commissioner's Order No. 98-1418 previously entered herein be amended nunc pro tunc as of the date of entry thereof, to read as follows:
On this day came on for consideration by the Commissioner of Insurance (Commissioner) the setting of presumptive premium rates for credit life and credit accident and health insurance. The Commissioner has jurisdiction over this matter pursuant to the Insurance Code §§ 40.001 - 40.060 (formerly Art. 1.33B) and 3.53 (Vernon 1981 and Supp. 1999).
The Commissioner referred this matter to the State Office of Administrative Hearings (SOAH) for hearing by filing a request for setting of hearing on October 7, 1998. The notice of hearing, issued October 7, 1998, was sent to various potential parties and published in 23 Tex Reg 10724 (October 16, 1998). The hearing for this case was conducted January 26 through January 28, 1999, at the Stephen F. Austin Building, 1700 North Congress, Austin, Texas, before SOAH Administrative Law Judges (ALJs) Wendy Ingham Hunn and Sarah G. Ramos. The following parties participated in the hearing or in prehearing conferences:
Consumer Credit Insurance Association CCIA Jay A. Thompson, Attorney
Texas Association of Life & Health Insurers TALHI Will D. Davis, Attorney
Independent Bankers Association of Texas IBAT Karen M. Neeley, General Counsel
The Staff of the Texas Department of Insurance Staff David Randell and Bill Bingham, Staff Attorneys
The Office of Public Insurance Counsel OPIC Rod Bordelon, Public Counsel; Lanetta M. Cooper, Senior Staff Attorney; and Erin Martens, Staff Attorney
The Center for Economic Justice CEJ D. J. Powers, Attorney
The record closed on March 10, 1999, after the parties filed briefs and reply briefs.
Notice and jurisdiction were not contested issues. Aspects of the procedural history, as well as issues pertaining to notice and jurisdiction, are discussed in Findings of Fact Nos. 1-7 and Conclusions of Law Nos. 1-3.
At the hearing or in prefiled documents, the parties presented evidence through the following witnesses:
CCIA Gary Fagg
TALHI David Huff
IBAT Steven Y. Scurlock
Staff William K. Robinson
OPIC Allan I. Schwartz
CEJ Birny Birnbaum
On May 19, 1999, the ALJs made and filed a proposal for decision containing findings of fact and conclusions of law. The proposal was properly served on all parties, and all parties were given an opportunity to file exceptions and replies as part of the record herein. In response to exceptions and replies, the ALJs issued an amended proposal for decision on July 9, 1999.
On September 22, 1999, the Commissioner considered the proposal for decision and the exceptions, briefs, and arguments of the parties in open meeting. The Commissioner, after review and due consideration of said matters, adopts the following findings of fact and conclusions of law. The Insurance Code §§ 40.001 - 40.060 (formerly Art. 1.33B) permits the Commissioner to amend the proposal for decision, including any finding of fact or conclusion of law, but such amendments shall be based solely upon the record made before the ALJs. The Commissioner amended, adopted, or deleted certain proposed findings of fact and conclusions of law, denying all proposed findings of fact submitted by any party hereto not specifically adopted herein.
REASONED JUSTIFICATION FOR AMENDMENTS TO PROPOSED ORDER
The citation to the Insurance Code statutory provision which was Art. 1.33B, has been changed to show the citation to the same provision as re-codified. In the listing of parties and their representatives, Bill Bingham's name is added as a representative of TDI staff because he represented Staff in the oral arguments hearing. A listing of the parties and their witnesses was added. The date on which the Commissioner held the open meeting to consider the proposal for decision, the exceptions and replies, briefs, and the oral arguments of the parties in an open meeting is added. An explanation of how the Commissioner may amend the proposal for decision under the Insurance Code §§ 40.001 - 40.060 (formerly Art. 1.33B) is added.
References to amended, renumbered findings are shown by their new number followed by their original number in parenthesis.
Finding Nos. 30 - 33, 34, 35, 37, 38, 40 -43, 44 - 47, 48, 49, 50 - 77, 79, 80, 82, 83 -96, 98, 100 - 105, 106, and 107 - 110 are renumbered to Finding Nos. 29 - 32, 37, 40, 33, 34, 41 - 44, 46 - 49, 51, 53, 55 - 82, 83, 84, 85, 87 - 100, 101, 102 - 107, 109, 111 - 114, respectively. Finding Nos. 29, 78, 81, 97 and 99 are deleted; new Finding Nos. 35, 38, 45, 50, 52, 54, 86, 108, 110, and 115 - 117 are adopted; Finding Nos. 11, 16, 20, 21, 23, 32(33), 33(37), 36, 43(42), 51(48), 53(49), 55(50), 56(51), 63(58), 64(59), 66(61), 68(63), 87(83), 89(85), 91(87), 100(96), 101(98), and 107(105) are amended.
Legal Standard for Calculating Rates
Finding No. 11 is amended to indicate that the term "credit disability" will be used in the order to refer to "credit accident and health insurance."
Credit Life Insurance Calculation
Finding Nos. 16 and 21 are amended to correct the sign in front of the profit component in CEJ's formula from a positive to a negative sign, as indicated in Exhibit BB-5, paragraph 2, and in its testimony, and to more accurately describe how compensation should be included in the component rating formula. Similarly, Finding No. 23 is amended by deleting language indicating that the profit component would be handled differently if it was a negative number, when it actually would be handled the same regardless of whether it was a negative or a positive number. Finding No. 20 is amended to replace the term "compensation" with "premium" to more accurately describe how the amount of compensation is determined.
Finding No. 29 is deleted because it is not clear that the two claim costs are derived on a comparable basis and because this finding is not necessary to support this decision. Finding No. 31(32) is amended to correct a grammatical error and to more accurately describe the significance of the credit life claims cost component.
Reverse Competition and Compensation
Finding Nos. 32(33) and 43(42) are amended to correct grammatical errors. Finding No. 33(37) is amended to clarify that the other benefits mentioned are not necessarily always provided.
Finding No. 35 is adopted to amplify the findings in this section consistent with the evidence concerning the nature and existence of reverse competition in the credit insurance industry. Finding No. 36 is amended to conform more precisely with the evidence. Finding No. 38 is adopted to reflect the Commissioner's determination that the impact of reverse competition is probably greater than 6 percent. The Commissioner found the testimony of Mr. Birnbaum and the responses of Mr. Fagg to cross-examination questions persuasive in this regard. Finding No. 45 is adopted to clarify that the finding of a reasonable commission component does not determine the amount an insurer may pay as commissions.
Profit and Investment Income
Finding No. 50 is adopted to clarify that the notice of hearing contemplated that the parties would provide evidence comparing the relative risk of the credit insurance industry with other industries. Finding No. 51(48) is amended to delete the reference to homeowners rate decisions, to conform the finding to the evidence, and to more accurately state the automobile rate decisions' cost of capital. Finding No. 52 is adopted consistent with the evidence and to explain the rationale for determining a rate of return consistent with those determined in other lines of insurance. Finding No. 53(49) is amended to conform the finding to the evidence. Finding No. 54 is adopted to amplify the findings in this section consistent with the evidence on relative riskiness of the credit industry. Finding No. 55(50) is amended to reference the preceding findings of fact rather than actual decisions, because the Commissioner's determination to use 11.5% for cost of capital is based on the evidence contained in these findings, rather than the decisions themselves.
Finding No. 56(51) is amended to eliminate reference to percentages which are not directly related to the 42 companies referenced in the finding and are not necessary in arriving at a reasonable determination.
Finding No. 63(58) is amended to clarify that the seven percent is seven percent of premium and is a conservative estimate of the investment yield on policyholder-supplied funds. Finding No. 64(59) is amended to eliminate the reference to a total investment income factor of 14 percent. The seven percent yields involved in the calculations are percentages of differing bases and, therefore, cannot simply be added together as if they were percentages of the same bases.
Finding No. 66(61) is amended to clarify that the 1.75 percent premium tax rate is on gross premiums which are greater than $450,000. Finding No. 68(63) is amended to clarify that the component for taxes and fees is the tax rate, rather than the actual taxes paid. It is also amended to add the term "effective" to account for the tax rate described in Finding No. 66(61) and to correct a typographical error.
Finding No. 70(65) is amended to correct the location of the acronym "MOB." Finding No. 73(68) is amended to delete the "investment income" component from the presumptive premium rate formula for credit disability as is consistent with the ALJs' calculations and narrative concerning the same. This amendment also makes the credit disability formula consistent with the credit life formula.
Finding Nos. 78 and 81 are deleted because they are not necessary and the underlying rationale was not part of the Commissioner's decision-making process. The characteristics of individual debtors are not a consideration.
Finding No. 86 is adopted to clarify that, although the record contains some evidence regarding distinguishing by type and class of business, the Commissioner did not find a persuasive methodology for varying the rates by type and class of business. Finding No. 87(83) is amended to clarify that the Commissioner did not distinguish by type and class of business in this proceeding because the evidence in the record did not adequately support it. However, there may be evidence presented in future hearings which would warrant distinguishing by class.
Finding Nos. 89(85) and 91(87) are amended to clarify that the presumptive rates described in these findings are the rates prior to the application of a discount factor.
Finding Nos. 100(96) and 101(98) are amended to clarify that the term "n" in the discount factor represents the number of months of insurance coverage rather than the number of months of the loan. Finding No. 100(96) is also amended to correct the reference to the factor as the "discount" factor, rather than the "selected" factor.
Finding Nos. 97 and 99 are deleted because they are somewhat misleading, since the examples in the findings assume a loan duration of 20 months which is not the average duration. The anticipated loss ratios from credit life and credit disability are more accurately stated in Finding Nos. 108 and 110, respectively.
Reasonableness of Resulting Loss Ratio
Finding No. 107(105) is amended to clarify that the result of the calculation in this finding reflects the anticipated loss ratio prior to the application of the discount factor.
Finding Nos. 108 and 110 are adopted to more accurately describe the anticipated loss ratios with the average policy durations (based on 1996 and 1997 expense data) and average discount factors applied for credit life and credit disability, respectively.
Finding Nos. 115 and 117 are adopted to reference Appendix B containing the converted credit life presumptive rates and Appendix C containing credit disability presumptive rates, pursuant to Finding No. 114(110). Finding No. 116 is adopted to clarify that all current credit disability rates must be multiplied by the ratio stated prior to converting the rates, pursuant to Finding No. 114(110).
Conclusion Nos. 2 and 3 are amended to change the citation to the TEX. INS. Code §§ 40.001 - 40.060 (formerly Art. 1.33B) as that citation has been revised. Conclusion No. 4 is amended to clarify that the rates discussed are the individual rates.
Conclusion No. 12 and the Order are amended to include the effective date determined by the Commissioner.
Appendix A is amended to delete two types of coverage listed that do not have presumptive rates and to include two other types of coverage that should be included in the list.
Appendix B is deleted because this Appendix is not necessary to support the Findings of Fact and Conclusions of Law contained in this order.
Appendices B and C which contain the credit life presumptive rates and the credit disability presumptive rates, respectively, are adopted.
The notice of hearing, issued October 7, 1998, was sent to various potential parties and published in 23 Tex Reg 10724 (October 16, 1998).
The notice of hearing set the first prehearing conference on November 10, 1998.
At the November 10, 1998, prehearing conference, the following persons were designated as parties:
Consumer Credit Insurance Association (CCIA) - represented by Jay A. Thompson, Attorney;
Texas Association of Life & Health Insurers (TALHI)- represented by Will D. Davis, Attorney;
Independent Bankers Association of Texas (IBAT) - represented by Karen M. Neeley, General Counsel;
The Staff of the Texas Department of Insurance (Staff) - represented by David Randell, Senior Staff Attorney;
The Office of Public Insurance Counsel (OPIC) - represented by Rod Bordelon, Public Counsel; Lanetta M. Cooper, Senior Staff Attorney; and Erin Martens, Staff Attorney; and
Center for Economic Justice (CEJ) - represented by D. J. Powers, Attorney.
The hearing, originally set for January 12, 1999, was continued to January 26, 1999, by ALJ order issued December 9, 1999, and sent by facsimile to all parties.
All named parties participated in a January 15, 1999, prehearing conference during which the Administrative Law Judges (ALJs) heard arguments on prehearing motions.
The hearing convened on January 26, 1999, in the State Office of Administrative Hearings (SOAH) hearing rooms, Suite 1100, Stephen F. Austin Building, 1700 North Congress Avenue, Austin, Texas, before SOAH ALJs. Except for IBAT, representatives for all named parties appeared and participated in the hearing. The hearing continued from day to day until completed on January 28, 1999.
The transcript was filed February 11, 1999; initial briefs were due March 2, 1999; reply briefs were due March 10, 1999; and the record closed on March 10, 1999.
At the hearing, the ALJs took official notice of the following:
State Board of Insurance (SBI) Order No. 37495, "Repeal of Rules 059.03.53.001-059.03.53.002 and Adoption of Rules 059.53.01.001 - 059.53.14.002 and 059.53.20.001 - .003," dated July 3, 1980;
SBI Order No. 58505, "Presumptive Premium Rates for Credit Life and Credit Accident and Health Insurance in the State of Texas Effective October 1, 1991," dated June 27, 1991;
SBI Order No. 59721, "Presumptive Premium Rates for Credit Life and Credit Accident and Health Insurance in the State of Texas, in Docket No. 1869," dated July 1, 1992; and
SBI Order No. 59635, "Subchapter FF. Credit Life and Accident Health General Provisions 28 TAC §§ 3.5001-3.6403," dated June 16, 1992.
In 1980, when 28 TEX. ADMIN. CODE (TAC) §3.5202 was adopted, there was no legislative authority for the Department to adopt and promulgate an industry-wide presumptive premium rate for credit insurance.
Article 3.53, §8A(3), which gave that authority to the Commissioner, was not enacted until a year later, in 1981.
Board Order No. 58505, issued on June 27, 1991, set presumptive rates for credit life and credit accident and health (credit disability) insurance in the State of Texas, effective October 1, 1991. In that Order, the Board took official notice of §3.5202, but also found that the presumptive rates established for credit life had a loss ratio of 42.1%.
In 1992, the Board considered recommended changes to 28 TAC §§3.5201 and 3.5202, and stated that the language regarding the basic test of reasonableness is appropriate and is essential for the approval of rate deviations and the approval of rates for coverages that do not have presumptive rates established.
In this proceeding, the component rating proposals most accurately addressed the rate standards identified in Article 3.53, §8A(3).
Credit life insurance coverage is divided into the following classes based on the type of business at which the insurance is issued:
A Commercial Banks, Savings & Loan Assn. & Mortgage Companies
B Finance Companies, Small Loan Companies
C Credit Unions
D Production Credit Associations (Agricultural P.C.A.s)
E Dealers (Auto & Truck Dealers, Other Dealers, Retail Stores, etc.)
F Other Than A thru E (Specify)
There are also eight different "benefit plans" for credit life insurance, which are classified based on such factors as single life vs. joint lives, single premium (SP) vs. outstanding balance, also referred to as monthly outstanding balance (MOB), revolving account or other than revolving account, and reducing term vs. level term. Those plans are described in Appendix A, which is incorporated in this finding as though set forth in its entirety.
The parties proposed the following formulas be used to calculate the presumptive premium rate for credit life insurance coverage:
CCIA: (Claim costs)+(General Insurer Expenses)+(Compensation)
1+(Investment income)-(Taxes)-(Return on equity)
Staff: (Claim costs)+(General Insurer Expenses)
1+(Invest. Income)-(Commissions)-(Prem. Taxes)-(Fed. Inc. Tax)-(Profit Return)
CEJ: (Claim Costs)+(Fixed General Expenses)
1-(Variable Expenses)-(Taxes/fees)-(Profit)-(Commission)
OPIC: (did not propose component rating formula)
TALHI: (did not propose component rating formula)
Most parties developed rates for SP life reducing coverage and developed rates for other plans based on the result.
CEJ used a component rating method to develop an MOB base, established a SP life reducing coverage rate by converting the MOB rates, and then applied the following interest/mortality/term discount factor:
It is reasonable and in accordance with standard industry practice to place only the "claim costs" and "general insurer expenses" components in the numerator of the formula.
"Compensation" should not be included in the numerator because it is paid as a percentage of premium, not as a fixed cost. Percentage components should be placed in the denominator.
The following components appear in the denominator of the various formulas for calculating credit life insurance rates: CCIA: 1+(Investment income)-(Taxes)-(Return on equity)
Staff: 1+(Invest. income)-(Commissions)-(Prem.Taxes)-(Fed. Tax)-(Profit Return)
CEJ: 1-(Variable Expenses)-(Taxes/Fees) - (Profit)-(Commission)
Based on the previous conclusion that only the "claim costs" and "general insurer expenses" components belong in the numerator, and on the components included in the denominators by each expert, the following components should be in the denominator: investment income, taxes and fees, profit, and commissions.
The components in the denominator will be added or subtracted from the number one, as follows: the tax component will be subtracted; compensation or commissions will be treated as a deduction in the denominator; return on equity or profit will be subtracted; and investment income will be added to the number.
Based on the foregoing findings of fact, the following formula best comports with industry practices and statutory requirements for this hearing, and is the basic formula with which to determine the presumptive premium rate for credit life insurance:
(Claim costs) + (General Insurer Expenses)
1 + (Investment income) - (Taxes and Fees) - (Return on Equity/Profit) - (Commissions)
The loss ratios across classes of business and benefit plans have been very stable; use of a three-year average versus a four-year average would not create significantly different results.
Even though three-year data contains less seven-day retroactive policy information, most of the selected components were all calculated using four years of data.
Four years of data should be used in the rate calculation.
Claim costs are reported to the Department by insurers, so are part of the data made available to all the parties.
Two methods used to calculate the claim cost value are: (1) multiplying the single premium prima facie rate by the prima facie loss ratio, and (2) comparing incurred losses to mean insurance in force.
The parties' recommendations on the claim costs component varied only slightly, and those differences are based on the formula used to calculate the value and on the portion of the data (single life, single premium experience only versus combined loss experience of all plans) selected for use in that formula.
Use of the combined loss experience of all plans results in an average claim cost of 14.4¢ which is reasonable for the credit life claim cost component.
The notice of hearing defines reverse competition as "the act of directing competitive efforts towards the producers of the business rather than the ultimate consumers of credit insurance, which has the effect of raising rather than lowering prices to consumers."
Competition in the credit insurance industry raises, rather than lowers, credit insurance costs because competitive efforts are aimed at the producers; insurers pay higher commissions in order to attract more business. They may also provide other benefits, such as training and computers.
When credit life claim costs are lower, the savings are not passed along to consumers in the form of lower rates; instead, insurers charge the prima facie rate and producers receive greater compensation.
In the credit insurance marketplace, higher rates provide more income that will be shared primarily with producers.
A good possibility exists that if a credit insurance rate is excessive, the compensation level will also be excessive.
In 1992, Mr. Fagg performed a study addressing reverse competition in the credit insurance market. His study showed that reverse competition inflated expenses about 6%.
Other evidence suggests that the effect of reverse compensation may be significantly greater than Mr. Fagg's 6%.
There is reverse competition in the credit insurance industry.
The level of compensation should reasonably relate to loss experience.
Article 3.53, §8 requires use of reasonable acquisition costs, loss ratios, and administrative expenses.
The commission ratio averages for credit life for 1995 through 1997 were:
Banks 35.8%
Credit Unions 20.7%
PCAs 25.6%
Dealers 48.4%
Total 38.1%
For credit life insurance, it would be unreasonable to set rates using actual commissions (35% of the current 36-cent rate) because of reverse competition.
A reasonable commission component for credit life insurance is 25%.
The commission component does not fix or limit the amount an insurer may pay in commissions.
The annual data call did not specify types of expenses that would be appropriate to exclude from rate calculations, such as payments for bad faith settlement practices, administrative penalties, and advisory organization membership.
There was no evidence indicating what would be an appropriate percentage of expenses attributable to the types of expenses mentioned in the previous finding.
Credit life expenses should be determined as follows:
The average number of Texas policies as a percentage of the average countrywide policies should be determined. The resulting factor should be multiplied times the total countrywide expenses to estimate Texas expenses. The estimated Texas expenses should be divided by the Texas actual earned premium. Expenses per $100 of coverage per year should be calculated.
A reasonable expense component for single premium reducing credit life insurance is .0802¢/100.
In the notice of hearing the Commissioner requested evidence on the relative risk of the credit insurance industry as compared to other industries.
The Commissioner has recently determined in the automobile (voluntary and Texas Automobile Insurance Plan Association (TAIPA)) rate decisions that 11.25 to 11.75% are reasonable components for cost of capital.
Because the Commissioner has determined that a reasonable target cost of capital for automobile insurance in Texas is in the 11.25 to 11.75% range, a comparison of credit insurance to this line to see if credit insurance is more or less risky can provide a basis for determining whether the same range of returns is appropriate for credit insurance.
Because credit insurance is characterized by stable losses and expenses, it is probably less risky than other lines.
There is no persuasive evidence in this record that credit insurance is any riskier than automobile insurance.
Based on Findings of Fact 50 - 54, 11.5% is a reasonable credit insurance cost of capital.
For the top 42 companies writing credit insurance business in Texas in 1996, the four-year average of net investment income to premiums for both credit life and credit disability insurance was 15.7%.
Because of the investment income the insurer earns in the credit transaction, the insurer can actually have a negative underwriting profit and still make a reasonable overall profit.
With an effective tax rate of 30% and a target after-tax return of 11.5%, a before-tax return of 16.43% is needed to arrive at a reasonable return on equity.
Seven percent is an appropriate investment yield on surplus to subtract from the before-tax return of 16.43%.
As a result of the preceding calculations, 9.43% must be earned from insurance operations.
Texas credit insurers have an actual 2:1 premium to surplus ratio.
Based on that ratio, it would take a 4.71% return on premium to obtain the necessary 9.43% return on surplus.
Expressed as a percentage of premium, 7% is a conservative investment yield on policyholder supplied funds to deduct from the required return to derive an approximate -2% profit factor (4.71% - 7% = -2.29%).
Due to the selection of a profit component calculated in a manner that reflects investment income, the basic formula set forth in Finding of Fact No. 24 will be adjusted to exclude the investment income component. To do otherwise would result in that component being deducted twice. The resulting formula is:
1 - (Taxes) - (Profit) - (Commissions)
The parties each estimated a value of 3% of premium for state taxes and fees.
Pursuant to Article 4.11, §§5F and 5G, insurers selling credit life and disability insurance pay premium taxes at one-half of 1.75% on the first $450,000 of gross premiums and pay 1.75% on gross premiums above that amount.
Texas allows insurers to recover guaranty funds assessments through offsetting premium tax payments. Article 21.28-D, §13.
Based on the actual effective premium tax rate and the lack of evidence regarding substantial additional taxes and fees, 2.75% is a reasonable component for taxes and fees (1.75% for premium taxes + 1.00% for miscellaneous taxes and fees).
Credit disability insurance is divided into the same six classes as credit life.
Credit disability benefit plans are currently classified based on such factors as single premium (SP) vs. outstanding balance, also referred to as monthly outstanding balance (MOB), revolving account or other than revolving account, and retroactive vs. non-retroactive. Those plans are described in Appendix A, which is incorporated in this finding as though set forth in its entirety.
About 61% of the credit disability insurance market is written in single premium 14-day retroactive disability insurance coverage.
For the reasons discussed in Findings of Fact Nos. 9-13, pertaining to credit life, the credit disability rates should be set using component rating factors that are then tested by a target loss ratio.
The basic formula with which to determine the presumptive premium rate for credit disability insurance will be:
An appropriate factor for credit disability claims cost is 1.5857 (the current rate, $3.21, multiplied by the experience loss ratio, 49.4%).
The actual credit disability expense component should be determined by comparing Texas policies to countrywide policies. Based on actual earned premium, the method produces an expense factor of 17% of the current rate (.17 x 3.21 = .5457).
For credit disability insurance, investment income as a percentage of premium is about 2% higher than it is for credit life insurance.
An appropriate credit disability profit component is -4%.
There was no evidence illustrating why the commission rate for credit disability should be higher than the commission rate for credit life.
The commission percentage of 25% is reasonable.
A reasonable credit disability component for taxes is 2.75%.
Article 3.53 §8 requires consideration of the type or class of business when setting rates.
Loss ratios varied among certain classes of producers, as shown in the following table:
Life Loss Ratios at Current Presumptive Rates
Disability Loss Ratios at Current Presumptive Rates
A - Banks, S & L, Etc. 48.66% 49.32%
B - Finance Companies and Small Loan Companies 40.33% 44.31%
C - Credit Unions 47.29% 67.20%
D - PCAs 65.62% N/A
E - Dealers 33.32% 43.21%
Other than A - E 72.46% 60.68%
Total 40.13% 49.36%
Certain parties proposed setting rates by producer class.
There was insufficient evidence to explain differences in class recommendations. For example, Staff recommended a separate rate for Class E only; however, for disability insurance, the loss ratios for Classes A, B, and E are similar, while the loss ratio for Class C is much higher.
When the Board set presumptive premium rates in 1991 and in 1992, there were differences between the automobile dealer class (Class E) and the other classes; yet the Board chose to set a single rate.
In this record, no party's recommendation as to how credit life and credit disability rate changes should vary by type and/or class of business was persuasive.
Based on the evidence in this record, credit life and disability rate changes determined in this proceeding should not vary by type and/or class of business.
When the recommended credit life component values are inserted into the component rating formula, the following base rate results:
= (.144) + (.0802)
1 - (.0275) - (-.02) - (.25)
= .2242
Based on the foregoing Findings of Fact, a presumptive premium rate of $0.30 per $100 of coverage is reasonable for a single premium credit life insurance policy, before the application of a discount factor.
When the recommended credit disability component values are inserted into the component rating formula the following base rate results:
= (49.4% x 3.21 = 1.5857) + (.17 x 3.21=.5457)
1 - (.0275) - (-0.04) - (.25)
= 2.1314
Based on the foregoing Findings of Fact, a rate of $2.79 per $1,000 of coverage is reasonable for a 36-month single premium reducing 14-day retroactive credit disability policy, before the application of a discount factor.
Joint Disability Coverage
Although there is no historical experience for joint disability coverage, insurers should realize some expense savings in issuing joint policies.
For joint life coverages in Texas, claim costs are about 150% of single life claims costs.
The weighted average age of credit disability consumers is 38.7 years, and 80% of all business is associated with age 50 or younger.
A reasonable value for joint disability coverage is 150% of the rate charged for disability coverage for a single person.
A SP/mortality discount will benefit those persons paying for their entire coverage upon commencement of the policy term.
Any discount would necessarily lower the amount an insurer receives for investment.
The selected provision for investment income includes investment yields lower than historical yields, and this offsets the discount.
The discount factor will directly benefit the person paying for SP coverage, the consumer who actually loses the time value of money.
An appropriate discount formula for single premium reducing credit life coverage, where the factor "n" represents the number of months of insurance coverage, is:
An appropriate discount formula for single premium credit disability insurance, where the factor "n" represents the number of months of insurance coverage, is:
In 1991, the Board established a presumptive rate for credit life that had a loss ratio of 42.1%.
In 1992, in Board Order No. 59721, the Board considered loss ratios (Finding of Fact No. 8) and lowered the rate to 36¢. With claim costs at 15¢, the expected loss ratio was again 42%.
The historical experience shows the overall loss ratios across all credit life classes of business and all plans of benefits have been very stable: 40.01% for 1994, 39.47% for 1995, 39.90% for 1996, and 41.01% for 1997. The four-year average for that coverage is 40.09%.
Although loss ratios in producer classes have varied, the total disability loss ratios have been relatively stable: 50.7% (1994); 49.1% (1995); 51.2% (1996); 47.2% (1997); and 49.5% averaged.
The anticipated loss ratio is calculated by dividing the proposed claim cost by the proposed rate.
For credit life, the proposed claim cost is .144 and the proposed rate is .30; thus, for single premium credit life coverage, the anticipated loss ratio is 48% (.144 ÷ .30 = .48), before application of the discount factor.
With application of an average discount factor (given the average policy duration of 42 months) the anticipated loss ratio for credit life is approximately 50.5%.
For credit disability, the proposed claim cost is 1.5857 and the proposed rate is $2.79; the anticipated loss ratio for single premium reducing 14-day retroactive 36-month credit disability policy, before application of a single premium discount, is 57%.
With application of an average discount factor (given the average policy duration of 41 months) the anticipated loss ratio for credit disability is approximately 60%.
The anticipated loss ratios are similar to loss ratios previously determined to be reasonable in prior agency orders and for individual rate deviation requests, as set forth in 28 TAC §3.5202.
The proposed loss ratios strike a proper balance between the benefit returned to consumers and the premium charged.
There was insufficient evidence presented upon which to make a finding about an appropriate formula to convert the recommended rates to other benefit plans.
The proposed SP rates should be converted for use with other benefit plans in the manner TDI Staff has previously converted them for use with other benefit plans, as shown in the 1991 and 1992 Board Orders, referred to in Findings of Fact 8.b. and 8.c.
The converted credit life single premium presumptive rates are contained in Appendix B, which is incorporated in this finding as though set forth in its entirety.
It is reasonable to multiply all current credit disability rates by the ratio of 2.79 (as described in Finding of Fact No. 91) to 3.21 (the prior rate) before converting these rates pursuant to Finding of Fact No. 114.
The converted credit disability presumptive rates are contained in Appendix C, which is incorporated in this finding as though set forth in its entirety.
The Commissioner of Insurance has jurisdiction over this matter pursuant to TEX. INS. CODE ANN. art. 3.53 (Vernon 1981 and Supp. 1999).
SOAH has jurisdiction over all matters relating to the conduct of a hearing, including the preparation of a proposal for decision with findings of fact and conclusions of law, pursuant to TEX. GOV'T. CODE ANN. ch. 2003 (Vernon 1999) and TEX. INS. CODE ANN. §§ 40.001 - 40.060 (formerly Art. 1.33B).
The public hearing concerning the establishment of presumptive premium rates for credit life insurance and credit accident and health insurance was held in compliance with the provisions of TEX. INS. CODE ANN.§§ 40.001 - 40.060 (formerly Art. 1.33B) and 3.53 and TEX. GOV'T. CODE ANN. ch. 2001 (Vernon 1999).
The Department's rule, 28 TAC §3.5202, regarding the basic test of the reasonableness of the relation of benefits to the premium charged, is applicable to individual rate and policy form submissions.
The Commissioner is not restricted to adopting only rates that agree with target loss ratios of 50% for credit life and 60% for credit accident and health insurance.
Article 3.53, §8 does not require adoption of a particular rating methodology but only lists the factors that must be considered.
In this proceeding, the component rating method more particularly considered the individual factors listed in the statute.
Based on Findings of Fact Nos. 9-13 and Conclusions of Law Nos. 4-7, TEX. INS. CODE ANN. art. 3.53, §§8A(2) and 8A(3), establish the proper factors for determining the presumptive premium rate for credit life insurance and credit disability insurance.
The presumptive premium rates for credit life insurance reflected in the foregoing Findings of Fact and Conclusions of Law just, reasonable, adequate, nonconfiscatory and not excessive to insurers, insureds or agents pursuant to TEX. INS. CODE ANN. art. 3.53.
The presumptive premium rates for credit accident and health insurance reflected in the foregoing Findings of Fact and Conclusions of Law are just, reasonable, adequate, nonconfiscatory and not excessive to insurers, insureds or agents pursuant to TEX. INS. CODE ANN. art. 3.53.
The presumptive premium rates for credit life and credit accident and health insurance include consideration of reasonable acquisition costs, loss ratios, and administrative expenses, reserves, loss settlement expenses, the type or class of business, the duration of various credit transactions, reasonable and adequate profits to the insurers, and other relevant data pursuant to TEX. INS. CODE ANN. art. 3.53.
The presumptive premium rates shall be in force and effect beginning April 1, 2000.
IT IS, THEREFORE, THE ORDER of the Commissioner of Insurance that the above findings of fact and conclusions of law are adopted.
IT IS, FURTHER, ORDERED that the presumptive premium rates for credit life and credit accident and health insurance be established in accordance with the foregoing findings and conclusions.
IT IS, FURTHER, ORDERED that the new presumptive premium rates become effective April 1, 2000 at 12:01 a.m.
Temporary Acting Commissioner
of Insurance For Jose Montemayor
Commissioner's Order No 00-0210