Opinion ID: 1189013
Heading Depth: 3
Heading Rank: 7

Heading: The Validity of the Rate Regulations as to Rollbacks With Respect to the Earthquake Line of Insurance

Text: (34) The superior court determined that the rate regulations as to rollbacks are invalid on their face insofar as they treat the line of earthquake insurance as they do. We disagree. We do not share the superior court's view that the rate regulations as to rollbacks are unsound in that they subject insurers to direct ratemaking. As the administrative law judge observed, direct ratemaking is an accounting convention; it is used by insurers generally, including 20th Century; and it guarantees consistent treatment of all insurers. True, direct ratemaking does not recognize an insurer's expenses for reinsurance in the form of premiums ceded to a reinsurer. But neither does it recognize the insurer's revenue from reinsurance in the form of losses ceded to that same reinsurer. The superior court implied that the nonrecognition of reinsurance expenses offends the takings and due process clauses of the United States and California Constitutions. It appears to have assumed that the insurer must be permitted to recover its entire cost of service  at least insofar as it is reasonable  by operation of one or both of these guaranties. That is not so. A regulated firm may be disallowed an element of its cost of service  even one that is reasonable  without suffering a taking or a denial of due process. The United States Supreme Court has so concluded under the federal charter. ( B. & O.R. Co. v. United States, supra, 345 U.S. at pp. 147-150 [97 L.Ed. at pp. 914-916].) We come to the same conclusion under that of the state. Any suggestion by the superior court that either organic law controls the choice of accounting conventions must be rejected out of hand. Neither do we share the superior court's view that the rate regulations as to rollbacks are unsound in that they depend in substantial part on the individual insurer's incurred losses for the rollback year. Recall that, in this regard, the superior court implied that the rate regulations as to rollbacks violate Proposition 103's proscription of inadequate rates in Insurance Code section 1861.05, subdivision (a): calculations are based on the insurer's loss data from a single year; calculations for the earthquake line, however, should be based on loss data from more than one year, because this line (along with others) is one with losses of low-frequency but high-severity; calculations for the earthquake line, if based on loss data from a single year with relatively small losses, are skewed to the confiscatory. We broadly agree with the administrative law judge: The rate regulations as to rollbacks yield generally supportable outcomes for individual insurers, although they disfavor those whose incurred losses are small and favor those whose incurred losses are large; in any event, they do not themselves determine the insurer's rate rollback liability; the minimum permitted earned premium for the earthquake line must not be viewed in isolation as an end result; together with the minimum permitted earned premium for each of the insurer's other lines, it functions only as an intermediate step in the refund calculation. Nevertheless, we cannot dismiss the concerns of the superior court. Calculations for the earthquake line, if based on loss data from a single year with relatively small incurred losses, do indeed verge toward the low end for any given insurer. But as stated above, confiscation is judged with an eye toward the regulated firm as an enterprise. That is to say, it depends in this context on the condition of the insurer as a whole  and not on the fortunes of any one or more of its lines, including earthquake. [23] Confiscation may perhaps turn on an insurer's earthquake line if the insurer writes that line alone. But it appears that few insurers, if any, satisfy this condition. Be that as it may, we state again what we have already stated. The rate regulations as to rollbacks expressly provide for variances as the final mechanism for rate adjustments necessary to avoid confiscation. If confiscation nonetheless results, it is properly charged against the variances. (See pt. III.I., post. ) Subject to the foregoing, there is nothing confiscatory in the treatment of the line of earthquake insurance. (See also Fireman's Fund Ins. Co. v. Garamendi, supra, 790 F. Supp. at p. 948 [implying that a regulation is not properly subject to a facial takings challenge either in whole or in part].) Neither is there anything arbitrary, discriminatory, or demonstrably irrelevant to the legitimate policy of the protection of consumer welfare.