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 166-2.6 - Disscussion of annual rate formulas

Current through Register Vol. 46, No. 28, July 10, 2024
(a) Professor Williams proposed two formulas
					 to measure profitability. He used the simpler formula in establishing
					 reasonable and excess profit levels. The more complex formula would require the
					 measurement of individual-insurer rates of return, although these returns would
					 then be summed over the industry and over the six-year period. The department
					 has adopted the simpler approach for measuring industry
					 profitability.
(b) The simpler
					 formula calculates all-industry, countrywide profitability but substitutes New
					 York automobile results for the countrywide underwriting results of the
					 industry. This approach makes several assumptions: funds attributable to
					 automobile insurance are held the industry average length of time; net worth is
					 attributable to automobile insurance policyholders in proportion to earned
					 premiums; capital gains or losses can and must be included. By using aggregate
					 data, furthermore, average industrywide expenses, premium-to-net worth ratios,
					 investment returns and New York underwriting returns are assumed. These
					 assumptions are reasonable and necessary to minimize distortions in the final
					 results.
(c) Investment income and
					 capital gains are now the major contributors to overall insurer profitability.
					 Section 677(5) (now section 2329) of the Insurance Law permits the use of
					 uniform assumptions when reasonable, and the department concurs with Professor
					 Williams' use of industrywide all-lines investment results in profitability
					 measurement. It is not the intention of the statute to reward or punish
					 individual insurers for their differences in investment strategy, financial
					 structure or good fortune.[FN7] Likewise, industrywide premium-to-surplus
					 ratios and taxes are used. New York's industrywide automobile underwriting
					 results are included in Professor Williams' formula, since individual-insurer
					 results are excessively volatile and would produce rates of return which would
					 not be credible.
(d) The simpler
					 formula is adequate for the task at hand. New York's underwriting results are
					 derived from the New York Insurance Department's Loss and Expense Ratios, which
					 in turn is compiled from individual-insurer annual statement and insurance
					 expense exhibit data. The second major data source for the simpler formula is
					 Best's Aggregates and Averages, from which industrywide all-lines investment
					 results are derived and which is compiled from individual-insurer annual
					 statement data. The department is satisfied that the results they give are
					 reliable.
[FN7] Although some significant differences may be lost
						through an aggregate approach, the inclusion of capital gains in the formula is
						most meaningful when a broader data base, incorporating many insurers' results
						over many years, is used. The statute requires that return on investment from
						all sources must be included. Therefore, the formula properly includes both
						realized and unrealized capital gains.