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 166-2.0 - Discussion of introduction

Current through Register Vol. 46, No. 28, July 10, 2024
(a) The
					 determination of "excess profits" is an undertaking of considerable technical
					 difficulty. For more than 60 years, regulators and others have attempted to
					 measure the profitability of insurance operations and to compare insurer
					 results to those of other industries. This department is aware of the
					 peculiarities of insurance accounting and of the nature of the business itself
					 which makes completely precise measurement and comparison impossible.[FN1] From
					 time to time, however, events inside and outside the insurance industry have
					 influenced profits and have spurred renewed inquiries into the question of
					 profitability. These events include the introduction and subsequent reform of
					 No-Fault insurance, the recurring energy crises of the 1970's (and a resulting
					 sharp drop in driving), the introduction of more fuel-efficient and more
					 difficult-to- repair automobiles, the rise and fall of auto theft rings, and
					 unprecedented rates of inflation coupled with historically high interest
					 rates.
(b) No responsible regulator
					 can ignore these events. The insurance business is affected with the public
					 interest and must inform the public of what is happening to its funds. The
					 department does not expect that implementation of section 677(5) (now section
					 2329) of the Insurance Law will end debate on the subject. This regulation
					 presents a reasonably simple, practical, and conceptually defensible approach
					 to the determination of excess profits which takes into account the interests
					 of all concerned--consumers, insurers, regulators and investors.
(c) If insurer profitability were relatively
					 stable over time, the task of selecting an excess profit level would be
					 simplified. However, insurer results have historically followed a cyclical
					 pattern. To comply with the statute, the excess point must be set at a level
					 which permits an economically acceptable return over many years, since no
					 retrospective recovery is possible following years of poor results.
(d) Some witnesses who testified at the
					 department's public hearings on the regulation favored a threshold so high as
					 to virtually eliminate the possibility of excess profits, while others would
					 have chosen a level low enough that excess profits would be earned quite often.
					 The statute, however, is more moderate than either of these approaches. Unlike
					 those who argue that all profits are ultimately reasonable, the premise of the
					 statute is that excess profits may indeed occur from time to time. In order to
					 serve the public properly, therefore, there should be a method to measure
					 insurer profitability and to credit policyholders with dividends should such
					 excess profits occur. Those who urge a more aggressive approach to
					 profitability have also misread our mandate. Auto insurance, for the most part,
					 is not priced like participating life insurance, where an allowance for future
					 dividends is included in the initial premium. Rates, which must be approved by
					 this department, are set at a reasonably low level of profitability. Thus, a
					 methodology which allows insurers to retain their profits in most instances is
					 consistent with the statute, and with a properly operating system.
(e) Regulators know that consumers are
					 adversely affected at both extremes of the underwriting cycle. When loss
					 experience is poor, insurers can justify requests for substantial and frequent
					 rate increases. In good times, however, when underwriting profits exceed the
					 target level, consumers tend to overpay for a period of time until rates are
					 lowered or loss costs increase. It is unrealistic to expect insurers to share
					 their good fortune with their policyholders on a purely voluntary basis.
					 Therefore, this regulation is intended to provide a mechanism for restoring
					 balance to the system in the event that overall rates of return exceed
					 expectations.
(f) The department
					 recognizes that carrying out the mandate of section 677(5) (now section 2329)
					 is a unique and difficult task. The department's consultant, Professor C.
					 Arthur Williams, who is also editor of the Journal of Risk and Insurance,
					 prepared a report[FN2] entitled "Determining Excess Profit Refunds on New York
					 State Automobile Insurance 1974-1982" (hereinafter cited as Williams). His
					 final report reflects consideration of the comments and suggestions of
					 consumers, specialists in insurance accounting, and others who presented their
					 views at these hearings. Professor Williams' report represents a major advance
					 in the measurement of insurer profitability. His approach, which uses
					 all-industry data averaged over time, produces results which have few of the
					 distortions present in earlier measures.
(g) Several witnesses at the department's
					 public hearings argued that competition is the best arbiter of price and the
					 best regulator of profit. The auto insurance market in New York is competitive.
					 Hundreds of companies offer coverage at a wide range of prices; consumers are
					 urged to shop for coverage; the great majority of insureds obtain their
					 automobile coverage in the voluntary market. Therefore, the department
					 recognizes that some competitive profit control already exists. Thus, an excess
					 profit formula must have adequate justification in order not to disrupt the
					 natural forces of the marketplace.
(h) A review of New York's historically
					 volatile results indicates that it is indeed possible to have unusually good
					 results in a single year, and that it is necessary to establish a formula for
					 dealing with such results if they occur with consistency.
[FN1] Insurers' annual statements, which are required to
						be filed with each state's insurance department, follow statutory accounting
						methods, which tend to value assets and liabilities on a liquidation basis.
						This method is more conservative than "GAAP" methods used in other industries,
						which typically evaluate assets and liabilities on a going-concern basis.
						Statutory accounting is somewhat better suited to measuring an insurer's
						solvency.
The insurance business itself is unlike other industries.
						Liabilities are uncertain until payment (sometimes years after they are
						incurred), although revenue is certain at a much earlier point. Funds on which
						investment income is earned are derived from several sources, including
						stockholders (if any), current policyholders and past policyholders. Even
						measurement of the inherent riskiness of the insurance business (and of the
						financial return required to take such risk) has produced wide differences of
						opinnion.
[FN2] Earlier drafts of the report were the subject of
						public hearings in July 1979 and again in April 1981. The department held a
						further hearing on this proposed regulation on October 5,
						1982.