Opinion ID: 1189013
Heading Depth: 3
Heading Rank: 5

Heading: The Validity of the Rate Regulations as to Rollbacks With Respect to the Measurement of Insurer Capital

Text: (32) The superior court determined that the rate regulations as to rollbacks are not invalid on their face insofar as they require that an insurer's capital be measured in accordance with statutory accounting principles or SAP, which apparently operate to limit the capital base to capital used and useful for providing insurance, instead of generally accepted accounting principles or GAAP. We agree. The use of statutory accounting principles, which are more conservative than generally accepted accounting principles, to measure an insurer's capital is altogether appropriate. As stated, statutory accounting principles are rules that state insurance departments have developed to regulate ... insurance companies ... to guarantee their continuing solvency. ( Meyers v. Moody, supra, 693 F.2d at p. 1218.) To this end, they mandate the employment of conservative methods in considering and valuing assets in calculating a company's financial condition.... ( Ibid. ) That statutory accounting principles apparently operate to limit the insurer's capital base to capital used and useful for providing insurance is unexceptionable. As noted, an insurer's surplus is its available capital backing up premiums. The superior court was right in stating that the Insurance Commissioner could reasonably have concluded that insureds need not provide a return on capital which is not required for insurance business. The commissioner's underlying position is sound: insureds do not have to pay for what does not give them marginal benefit. Surplus surplus  i.e., surplus beyond what is useful to back up premiums  inflates the insurer's capital base and any rate set thereon to the disadvantage of its insureds, while at the same time it produces investment income from appreciating assets. The superior court was also right in implying that the commissioner could reasonably have concluded that insureds need not provide a return on capital that is not actually employed for insurance business. The commissioner's underlying position is sound here as well: insureds do not have to pay for what does not give them any benefit whatsoever. There is certainly nothing confiscatory in the requirement that an insurer's capital be measured in accordance with statutory accounting principles instead of generally accepted accounting principles. (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.