New York Codes, Rules and Regulations › Title 11 - INSURANCE › Chapter V - Rates And Rating Organizations › Subchapter F - Treatment Of Excess Profits In Motor Vehicle Insurance › Part 166 - Treatment Of Excess Profits In Motor Vehicle Insurance › Subpart 166-2 - Discussion Of General Rules › Section 166-2.5 - Discussion of excess profit threshold

Current through Register Vol. 46, No. 28, July 10, 2024
(a) Section 677(5) (now section 2329) of the
					 Insurance Law specifies that an excess profit shall be "so far above a
					 reasonable profit as to amount to an excess profit." It is exceedingly
					 difficult to quantify this concept. The department has followed the general
					 approach of its consultant's statistical analysis and, largely on a judgment
					 basis, has modified the excess profit threshold of 22.4 percent that was
					 recommended by Professor Williams.
(b) The consultant discusses at some length
					 the choice of a proper probability level to assure that excess profits are not
					 due merely to chance. In an attempt to be fair to both consumers and insurers,
					 he narrows the choices to a five-percent or 10-percent "confidence" level. (To
					 select, for example, a five-percent confidence level is essentially equivalent
					 to asserting that there is a 95-percent probability that the results observed
					 will be statistically significant and not due to chance). Using New York data
					 for the period 1962- 1978, Professor Williams shows that a five- percent
					 criterion would result in a 22.4-percent excess point; a 10-percent criterion
					 would result in a 21.4- percent excess point. (These figures are based on the
					 observed standard deviation of.0266.) Professor Williams chooses a five-percent
					 confidence level, in part due to a belief that other assumptions made in the
					 formula would tend to produce too low a threshold. Thus, the choice of
					 confidence level is partly a balancing factor, intended to keep the overall
					 result as free from bias (upward or downward) as possible. He states,
					 nevertheless, "The five-percent probability level may be slightly lower than it
					 should be." Thus, if Professor Williams had chosen the 10-percent assumption,
					 an excess profit level of 21 percent would have resulted.
(c) Utilizing the two additional years of
					 data now available to the department, the standard deviation of six-year
					 average rates of return for New York automobile business (1962-1980) has risen
					 from 0.0266 to 0.0416. For comparison, the standard deviation of six-year
					 average rates of return for all lines of insurance business for the entire
					 country from 1917 to 1979 is 0.0360. [FN6]
(d) Although a 10-percent confidence
					 assumption is a reasonable choice in many circumstances, the department must
					 exercise caution in view of:
(1) the dramatic
					 increase in the standard deviation produced by the addition of only the latest
					 two years;
(2) a likelihood that
					 some of the fluctuation measured by the standard deviation is due to transitory
					 higher interest rates in recent years; and
(3) the interrelationship of the choices of
					 reasonable and excess profit levels.