Opinion ID: 1279260
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Heading Rank: 1

Heading: The Relevancy Of The Cost Trend Projection

Text: In fixing by law the premium rate, it is the legislative power of the State which is being exercised. It is not only impractical to fix premium rates retroactively, it is expressly required by G.S. § 58-131.2 that premium rates fixed in accordance with the statutory plan be applied only to policies issued after the rates are so established. Consequently, the entire procedure contemplates a looking to the future. The policy contracts fix in advance the premiums to be charged therefor by the issuing company. For the premiums so fixed at the inception of the policy, the company contracts that it will pay, within the maximum limit stated in the policy, the cost of replacing property destroyed by fire occurring in the then future. Thus, the amount which the company is obligated to pay is measured not by the cost of such replacement at the inception of the policy but by the cost of such replacement at the time of the fire. G.S. § 58-176. Consequently, the problem for the rate maker is to determine what amount, collected as premiums at the inception of the policies hereafter to be issued, will enable the company (1) to pay losses to be incurred during the life of such policies, at replacement costs prevailing at the time of such losses, (2) to pay other proper operating expenses of the company, and (3) to retain a fair and reasonable profit. Fire insurance is an economic necessity for owners of property. A policy issued by an insolvent company is no insurance at all, or virtually so. In the foregoing statutory plan, the State has undertaken to make available to its people the economic necessity of fire insurance policies, which actually insure, by authorizing the Bureau to propose premium rates just as would a single company having a monopoly of the fire insurance business in North Carolina. To protect the public against the danger of exorbitant rates for this economic necessity, which danger is inherent in monopolistic price fixing, the Legislature has vested in the Commissioner its own authority to withhold approval of such rates proposed by the Bureau and to fix rates which are fair and reasonable. [7, 8] It is beyond question that the Legislature may so delegate this authority to an administrative officer provided it prescribes sufficiently clear standards to control his discretion. See: Harrill v. Retirement System and Bird v. Retirement System, 271 N.C. 357, 156 S.E.2d 702; State ex rel. Utilities Comm. v. State and State ex rel. Utilities Comm. v. Southern Bell Telephone & Telegraph Co., 239 N.C. 333, 80 S.E.2d 133; Carolina-Virginia Coastal Highway v. Coastal Turnpike Authority, 237 N.C. 52, 74 S.E.2d 310. The statutory plan above set forth complies with that constitutional requirement. Obviously, the Commissioner of Insurance has no authority to prescribe or regulate premium rates, except insofar as that authority has been conferred upon him by the above mentioned statutes. In exercising that authority he must comply with the statutory procedures and standards. Specifically, G.S. § 58-131.2 directs him to fix premium rates such as will produce a fair and reasonable profit and no more. In reaching this end result, he is directed by that statute to give consideration to all reasonable and related factors, including, but not limited to, the conflagration and catastrophe hazard, the past and prospective loss experience, the loss trend at the time of the investigation and the experience of the fire insurance business during a period of not less than five years next preceding the year in which the review is made. It will be observed that the experience of the companies in the five calendar years next preceding the year of the investigation is not the sole factor to be considered by the Commissioner in fixing the rates for the future. He is also directed to consider the prospective loss experience, including the loss trend at the time the investigation is being made. Admittedly, these terms are not as precise as might be desirable. It, nevertheless, seems clear that the prospective loss experience and the present loss trend relate, not only to the number of fires and to the extent of the physical destruction thereby, but also to the cost of replacement of the destroyed property. A statute must be construed in the light of the purpose to be accomplished. In Re Dillingham, 257 N.C. 684, 127 S.E. 2d 584; City of Greensboro v. Smith, 241 N.C. 363, 85 S.E.2d 292; Victory Cab Company v. City of Charlotte, 234 N.C. 572, 68 S.E.2d 433. Here, the purpose of the statute is to provide for the public, at reasonable cost, insurance in financially responsible companies. Not only fair play, but the accomplishment of this legislative purpose as well, requires that the premium be fixed at a level which will enable the insuring company (i. e., the entire insurance industry in this State treated as if it were one company) (1) to pay the losses which will be incurred during the life of the policies to be issued under such rates, (2) to pay other operating expenses, and (3) to retain a fair and reasonable profit and no more. To accomplish this purpose the Commissioner must consider the losses, both in number and in cost, which will be incurred in the future; i. e., during the life of the policies issued under the rates fixed by him. Obviously, the determination of the cost of replacing losses to be incurred at price levels then to prevail is a matter of informed judgment and not of precise calculation. Such judgment can be formed only by consideration both of the past experience and of the present prevailing conditions. This is true both as to the number and physical extent of the losses to be anticipated and as to the cost of replacing such losses as they occur. For this reason, the statute specifically directs the Commissioner to consider the experience of the fire insurance business during a period of not less than five years preceding the year of the investigation. He is not limited, however, to that experience, but may extend his consideration to the experience of still earlier years, so long as such years are reasonable and related to an informed judgment as to the future. Evidence that present conditions are not those which prevailed during such former experience is, obviously, relevant to the translation of the past experience into an informed judgment concerning the future. For example, the past loss experience should be adjusted to take into account any newly discovered practicable procedures and devices for reducing the risk of fire. Similarly, recent events reliably indicating a rise, or a fall, in replacement costs previously experienced is a relevant circumstance in determining the extent to which past experience supplies a reliable guide to the future in the matter of replacement costs. The use of past experience to estimate future needs involves, of necessity, a projection of known data into the unknown future. See: Los Angeles Gas & Electric Corporation v. Railroad Commission, 289 U.S. 287, 311, 53 S.Ct. 637, 77 L.Ed. 1180; McCardle v. Indianapolis Water Company, 272 U.S. 400, 408, 47 S.Ct. 144, 71 L.Ed. 316; Central Maine Power Company v. Public Utilities Commission, 153 Me. 228, 136 A.2d 726, 732-735. To bring past experience to the present level, by pro forma adjustments of premiums earned and losses incurred, and then to stop the adjusting process, is to project into the future the assumption that there will be no further change in the incidence of fires, in the extent of physical destruction thereby or in the cost of replacing the destroyed property. The question, therefore, is not whether a projection shall be made by the Commissioner, from the present into the future, for that is inevitable in the discharge of his statutory duty of fixing, for the future, a fair and reasonable premium rate. The question is as to the relevancy and trustworthiness of proposed evidence to and in the determination of the direction of such projection. As the Court of Appeals stated, the Commissioner of Insurance is a specialist in the field and has been given by the Legislature the authority and the duty to set rates which will, in the future, produce a fair and reasonable profit and no more. His projection of past experience and present conditions into the future is presumed to be correct and proper if supported by substantial evidence, G.S. § 58-9.3, and if he has taken into account all of the relevant facts which he is directed by the statute to consider. G.S. § 58-131.2. The expert opinion of a witness, however well informed, as to what things are proper for consideration by the Commissioner in making his projection is not determinative. That is a matter determined by the provisions of the statute. Thus, the presence in this record of testimony of the actuary for the Department of Insurance that, in his admittedly expert opinion, it would not be conservative or proper for the Commissioner, in fixing rates for the future, to consider a projection of the present and past cost trend does not afford a basis for calling into play the statutory presumption that the order of the Commissioner, resting upon the same conclusion, is correct and proper because supported by substantial evidence. We hold that otherwise competent opinion evidence as to such projection is, as a matter of law, relevant to the determination by the Commissioner of the probable loss experience of the companies during the life of policies to be issued in the near future. Here, the Commissioner has expressly refused to consider the evidence at all. Like the Court of Appeals, we cannot determine, and we have no authority to determine, whether the weighting process used by the Bureau in translating past experience into present conditions, plus the further adjustment of past experience to the present by applying to past costs inflation already experienced, leads, without more, to a correct projection of past experience and present conditions into that part of the future covered by policies hereafter to be issued. That question we do not determine. What we do hold is that evidence, otherwise competent, of a cost trend, upward or downward, which continues from the past into the present, and expert testimony, otherwise competent, that such trend may reasonably be expected to continue into the future, so that future costs will be higher or lower than present costs, is evidence of reasonable and related factors which G.S. § 58-131.2 requires the Commissioner to consider in making his own projection into the future. It is not a proper ground for the rejection of such evidence that such projection of an upward or downward cost trend into the future has never before been used in the rate making process. The statute does not contemplate that procedures and methods for determining replacement costs for the future shall be frozen. See: National Bureau of Casuality Underwriters v. Superintendent of Insurance, 6 A.D.2d 73, 174 N.Y.S.2d 836, 840. In its holding that consideration of a prevailing cost trend, established by otherwise competent and credible evidence, is a policy matter and should rest with the Commissioner, we think the Court of Appeals erred and to that extent its decision is hereby reversed. We conclude that the evidence offered by the Bureau as to the probability of a cost level on 30 June 1968 higher than that prevailing at the time of the filing, or at the time of the hearing before the Commissioner, was relevant and was improperly excluded by the Commissioner from his consideration. Its credibility and weight, as distinguished from its relevancy, are to be determined by the Commissioner. See: Insurance Department v. City of Philadelphia, 196 Pa. Super. 221, 173 A.2d 811; Long v. National Bureau of Casualty Underwriters, 209, Tenn. 435, 354 S.W.2d 255. It is not, necessarily, more speculative than is expert testimony as to pain, suffering and disability to be experienced in the future by an injured person.