California Code of Regulations › Title 10 - Investment › Chapter 5 - Insurance Commissioner › Subchapter 4.8 - Review of Rates › Article 4 - Determination of Reasonable Rates › Section 2644.12 - Efficiency Standard

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) The
				  Commissioner shall calculate the efficiency standard annually, within 45 days
				  of the publication of the necessary source data, which shall be expressed as a
				  maximum allowable ratio of historic underwriting expenses, including adjusting
				  and other expenses, to historic earned premiums, which represents the fixed and
				  variable cost for a reasonably efficient insurer to provide insurance and to
				  render good service to its customers.
(b) The efficiency standard shall be set
				  separately for each insurance line, and separately for insurers distributing
				  through independent agents and brokers, through exclusive agents, and through
				  employees of the insurer selling insurance on a direct basis. For an insurer
				  using more than one distribution system, the efficiency standard shall consist
				  of an average weighted by earned premium for each distribution system. In
				  setting the efficiency standard, the Commissioner shall determine whether, in
				  the long-term, efficiency will be enhanced and premiums lowered by adopting a
				  separate standard for insurers writing large and small amounts of insurance in
				  the line. If the Commissioner determines that such separate standards would
				  have such long-term effects, the Commissioner shall set the standard separately
				  according to the amount of insurance being written in the line, pursuant to
				  section 2646.3. In lines where the number
				  of insurers employing a given distribution system is, in the judgment of the
				  Commissioner, inadequate for the calculation of a mean that provides a useful
				  efficiency standard, the Commissioner shall adopt a single efficiency standard
				  for that line, pursuant to section
				  2646.3, which shall apply to all
				  insurers writing in that line regardless of distribution system. For lines of
				  business that combine personal and commercial exposures, the commissioner may
				  set separate efficiency standards, pursuant to section
				  2646.3.
(c) The efficiency standard shall be
				  calculated as the arithmetic average of the latest three years for which data
				  are available.
(d) For farmowners,
				  the efficiency standard for captive insurers shall be the average for all
				  distribution systems combined.
(e)
				  For earthquake, the efficiency standard shall exclude adjusting and other
				  expenses. Adjusting and other expenses shall be added to defense and cost
				  containment expenses.
(f) For
				  burglary and theft, all distribution systems shall be combined, and a five-year
				  average shall be used.
(g) In each
				  category, the efficiency standard shall be set at the weighted mean (weighted
				  by earned premium in California) expense ratio of insurers in that category. In
				  calculating the average, the Commissioner may exclude insurers for which
				  reliable data are not readily available.
(h) All data shall be taken from the National
				  Association of Insurance Commissioners database of the statutory annual
				  statement state page and of the Insurance Expense Exhibit, Part III.
(i) A company's data shall be included in the
				  calculation only if
(1) The company is
				  licensed in California;
(2) The
				  company's California direct earned premium is greater than zero;
(3) The company's countrywide direct earned
				  premium is greater than zero;
(4)
				  The company's countrywide direct losses incurred is greater than zero;
				  and
(5) The company's ratio of
				  underwriting expenses, including adjusting and other expenses, to earned
				  premium is greater than zero and less than 65%.