Opinion ID: 1424146
Heading Depth: 1
Heading Rank: 3

Heading: the board's order approving the rate filing as modified lacks evidentiary support

Text: The Attorney's General primary contention is that the Board erred by failing to compel the production of and hence to consider sufficient evidence about the financial condition of the insurers represented by NCCI. We agree. Our analysis begins with an overview of the pertinent statutes, 36 O.S. 1981 §§ 901 et seq., which govern the Board's adjudicative ratemaking functions. Regulation is the central tenor of the Insurance Code. [22] Every insurer is required to file with the Board, directly or through a licensed rating organization, all rates and rating plans which it uses or proposes to use in the state. [23] Rates in existence can be challenged by the Board sua sponte or by any party aggrieved because of those rates. If ... it shall be made to appear to the Board ... that there are reasonable grounds to believe that the rates on any or on all risks ... contravene the terms of 36 O.S. 1981 §§ 901 et seq., then the Board is required to act upon its statutory duty to investigate and to determine whether the rates conform to Code requirements. 36 O.S.Supp. 1982 § 903(B). In addition to permitting a challenge to existing rates, the legislature has provided that filings may also be contested. The pertinent terms of § 903(D) [24] provide that [a]ny person or organization aggrieved with respect to any filing ... may make written application to the Board for a hearing thereon. Whenever a hearing is held ... for the purpose of determining whether a filing complies with the provisions of [36 O.S. 1981 §§ 901 et seq.] ... the burden of proof shall rest on the insurer or rating organization which made such filing. [Emphasis added.] 36 O.S.Supp. 1982 § 903(C). [25] The statute's foremost mandate for ratemaking is that rates ... shall not be excessive, inadequate, or unfairly discriminatory. [26] When NCCI, by its filing, requested an increase in rates, it essentially asserted that the rates in effect at that time were inadequate. The third paragraph of § 902(A) explicitly governs how the Board determines whether rates are inadequate. It provides: No rate shall be held to be inadequate unless (1) such rate is unreasonably low for the insurance provided and (2) the continued use of such rate endangers the solvency of the insurer using the same, or unless (3) such rate is unreasonably low for the insurance provided and the use of such rate by the insurer using same has, or if continued will have, the effect of destroying competition or creating a monopoly. [Emphasis added.] This quoted provision, whose basic standards must be read in the disjunctive, prescribes two distinct measuring gauges, either of which must be employed in determining whether rates are inadequate. [27] Hence, a conclusion that rates are inadequate necessarily depends upon a finding that (1) rates are unreasonably low  a factor common to both gauges, and (2) either the use of the rates endangers insurer solvency or the rates do or will adversely affect competition or create a monopoly. It seems evident that NCCI elected to prove inadequacy of rates by attempting to establish that they (1) were unreasonably low and (2) endangered insurer solvency. [28] The Board, then, was required to determine whether NCCI had met its burden to establish these elements after giving due consideration to all of the factors prescribed by 36 O.S. 1981 § 902(B). The terms of this subsection provide: B. Due consideration shall be given to past and prospective loss experience within and outside the state, to physical hazards, to safety and loss prevention factors, to underwriting practice and judgment, to catastrophe hazards, if any, to a reasonable margin for underwriting profit and contingencies; to dividends, savings or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers; to past and prospective expenses both countrywide and those specially applicable to the state; to whether classification rates exist generally for the risks under consideration; to the rarity or peculiar characteristics of the risks; and to all other relevant factors within and outside the state.  [Emphasis added.] Upon examination of the record, we cannot conclude that NCCI tendered for the Board's consideration sufficient evidence about the actual financial condition of the insurers it represented to warrant a finding that the rates at the time of the filing were inadequate. Although the materials included in NCCI's filing contain numerous tables and exhibits, we have found no information from which the actual financial state of any NCCI member company may be reasonably ascertained. The financial data provided consist almost entirely of percentages computed from the application of various development factors. A few documents contain dollar figures without reference to the insurers to whom they pertain, and it is not apparent how the figures were determined. They may have been weighted averages of all NCCI companies or merely a total or average of ten major companies. In fact, NCCI admittedly excluded detailed data on investment income. [29] The necessity for disclosure of information on investment income becomes even more clear in light of the industry-recognized axiom that money is made from investments, not underwriting. [30] The evidence is devoid of any itemization of expenses by account. The filing contains but a general classification of expenses, and those figures are unverifiable. Before an adequate evaluation can be made of the effect of rates on the solvency of insurers, the Board must consider detailed evidence about the NCCI member companies' expenses. [31] In order for the Board to have given due consideration to not only each item specified in § 902(B) but also to all other relevant factors, specific data on NCCI companies should have been included in the filing. We have long held that one of the most important factors in determining whether rates are inadequate is the financial soundness of the insurer. [32] Evidence considered by the Board may include annual financial statements or other data forms from which net profit and dividends actually paid may be considered. [33] Among the other relevant factors that the Board must consider is income from unearned premium and loss reserves. [34] Because these reserves are in the nature of trust funds, income derived from them should inure to the benefit of policyholders and hence be considered by the Board. [35] The terms of § 902(B) expressly require the Board to consider dividends. Indeed, the Board has the authority and the duty to protect policyholders from the potential harm that may result from a declaration of unlawful or excessive dividends. [36] While the record indicates that the Board did retain an actuary to assist in its evaluation of NCCI's filing, we note that the Board is empowered also to employ statisticians, accountants, attorneys, auditors, investigators or any other technicians as it or the Board's administrator may deem necessary for examining the rate filing. [37] The only evidence found in the record on dividends consists of ten figures which represent the Oklahoma percentage of dividends to earned premiums for the years 1975 through 1984. This evidence is both wholly insufficient and insubstantial. No disclosure was made of the identity of the companies to which the figures may have applied. Although dividends may be relevant when compared with earned premiums, they must be considered in the context of an insurance company's complete financial profile. The submission of specific data on dividends would seem to meet the express terms of the statute, but we believe that more is required for a meaningful consideration. Dividends are paid from net earnings, and, without actual, verifiable information on net earnings, the Board would be unable to ascertain if the dividends were excessive. [38] The Attorney General also urges that there was insufficient evidence as to underwriting practices and judgments and as to safety and loss prevention factors. We agree. The record is devoid of specific, verifiable data for these items. Mindful that effective regulation through adequate disclosure for the public benefit is the fundamental purpose of the Insurance Code, we hold that, because of critical evidentiary voids, the Board's approval of NCCI's rate filing, as modified, cannot be affirmed. [39] It hence follows that the 41.9 percent rate increase sought by NCCI also is lacking in requisite evidentiary support. Where the evidence fails to support a preliminary determination that existing rates are inadequate, the Board cannot validly approve any rate increase. [40] Since NCCI's filing is insufficient to support the 25.9% rate increase for workers' compensation insurance, the excess over the existing rate which has been collected by the affected insurers must be refunded. The Board shall prescribe the method for refunding premium overpayments. The order under review is vacated and the proceeding remanded to the Board with directions to proceed in a manner not inconsistent with this opinion. ORDER VACATED AND PROCEEDING REMANDED. SIMMS, C.J., DOOLIN, V.C.J., and HODGES, HARGRAVE and SUMMERS, JJ., concur. LAVENDER, J., concurs in Parts I and II and dissents from Part III. ALMA WILSON, J., concurring specially. KAUGER, J., disqualified.