By: Bonnen H.B. No. 2876
A BILL TO BE ENTITLED
AN ACT
relating to automobile insurance rate regulation.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Chapter 5, Insurance Code, is amended by adding
Subchapter P to read as follows:
SUBCHAPTER P. PERSONAL AUTOMOBILE INSURANCE RATES AND FORMS
Art. 5.141. RATES FOR PERSONAL AUTOMOBILE INSURANCE
COVERAGE
Sec. 1. SCOPE; PURPOSE. (a) This article governs the
regulation of rates for personal automobile insurance.
(b) The purposes of this article are to:
(1) promote the public welfare by regulating personal
automobile insurance rates to prohibit excessive, inadequate, or
unfairly discriminatory rates;
(2) promote the availability of personal automobile
insurance;
(3) promote price competition among insurers to
provide rates and premiums that are responsive to competitive
market conditions; and
(4) prohibit price-fixing agreements and other
anticompetitive behavior by insurers.
(c) Notwithstanding Subsection (a) of this section, this
article does not apply to premium rates for motor vehicle insurance
computed using a mile-based rating plan under Article 5.01-4 of
this code.
Sec. 2. DEFINITIONS. In this article:
(1) "Allocated loss adjustment expenses" means the
industry's historic costs per exposure associated with the
adjustment of specific claims. These historic costs are recorded in
insurers' Annual Statements as "defense and cost containment
expenses", and shall include all paid amounts, case reserve amounts
and incurred but not reported (IBNR) amounts reported by each
insurer.
(2) "Classification" means a generic application to
similar risks within the same line.
(3) "Coverage" means a type of insurance within a line
of insurance as defined in Section 2(8).
(A) For the private passenger automobile
liability line, the coverages are bodily injury liability (BI),
property damage liability (PD), personal injury protection (PIP),
medical payments (MP), uninsured/underinsured motorist BI (UMBI),
and uninsured/underinsured motorist PD (UMPD).
(B) For the private passenger automobile
physical damage line, the coverages are collision, and other than
collision (OTC).
(4) "Disallowed expenses" means:
(A) Administrative expenses, not including
acquisition, loss control, and safety engineering expenses, that
exceed 110 percent of the industry median for those expenses;
(B) lobbying expenses;
(C) advertising expenses, except the following:
(i) advertising that is directly related to
the services or products provided by the insurer;
(ii) advertising designed and directed at
loss prevention; or
(iii) advertising for the promotion of
organizations exempt from federal taxation under Section
501(c)(3), Internal Revenue Code of 1986, and its subsequent
amendments;
(D) amounts paid by an insurer as damages in a
suit against the insurer for bad faith or as fines or penalties for
violation of law;
(E) contributions to organizations engaged in
legislative advocacy;
(F) fees and penalties imposed on the insurer for
civil or criminal violations of law;
(G) contributions to social, religious,
political, or fraternal organizations;
(H) fees and assessments paid to advisory
organizations; and
(I) any unreasonably incurred expenses, as
determined by the commissioner after notice and hearing.
(5) "Filer" means an insurer that files rates,
supplementary rating information, supporting information, rating
manuals, or any other information required to be filed under this
article.
(6) "Fixed expenses" means the industry's historic
fixed expenses per exposure. Fixed expenses include:
(1) other acquisition, field supervision, and
collection expenses incurred
(2) plus general expenses incurred as reported in
the Insurance Expense Exhibit, Section III-Texas Direct Premium.
Commission and brokerage expenses shall not be included in fixed
expenses.
(7) "Insurer" means an insurance company, reciprocal
or interinsurance exchange, mutual, capital stock company,
fraternal benefit society, local mutual aid association, Lloyd's
plan company, or other entity writing personal automobile insurance
or residential property insurance in the state.
(8) "Line" means a type of insurance subject to this
article. Two lines of insurance are covered by this article:
(1) private passenger automobile liability
(2) private passenger automobile physical
damage.
(9) "Loss trend" is the process by which factors that
are not reflected in historical loss data are expected to affect
losses in the prospective rating period.
(10) "Losses" means the industry's historic losses per
exposure, adjusted by catastrophe adjustment as prescribed by
Section 4(b) of this article. Historic losses shall include all
paid amounts, case reserve amounts and IBNR amounts reported by
each insurer.
(11) "Personal automobile insurance" means an
automobile insurance policy providing insurance coverages for the
ownership, maintenance, or use of private passenger, utility, and
miscellaneous type motor vehicles and trailers not primarily used
for the delivery of goods, materials, or services, unless such use
is in farm or ranch operations, and provided that such vehicles are
owned or leased by an individual or individuals. This term does not
include single interest insurance or to insurance on mobile homes,
motor homes, travel trailers, motorcycles, or antique, classic,
custom, or specialty insurance.
(12) "Profit Load" means the provision in the rate,
varying as a percentage of premium, for insurer profitability. For
the private passenger auto liability line, the profit load is 2.5%.
For the private passenger automobile physical damage line, the
profit load is 5%.
(13) "Projected allocated loss adjustment expenses"
means the allocated loss adjustment expenses, as defined in Section
2(1), trended in the manner described in Section 4(c) of this
article.
(14) "Projected fixed expenses" means the fixed
expenses, as defined in Section 2(6), trended in the manner
described in Section 4(c) of this article.
(15) "Projected losses" means the losses, as defined
in Section 2(10), trended in the manner described in Section 4(c) of
this article. Historic losses shall be on an accident-year basis.
(16) "Projected unallocated loss adjustment expenses"
means the unallocated loss adjustment expenses, as defined in
Section 2(24), trended in the manner described in Section 4(c) of
this article.
(17) "Rate" or "rating plan" means the charge for a
particular line for each unit of exposure.
(18) "Rate index" means the amount calculated by line,
in accordance with Section 4 of this article, relative to which the
rating bands and statutory rate limitations apply.
(19) "Rating band" means the range of rates above or
below the index calculated by line.
(20) "Rating period" shall be one calendar year
commencing on the effective date of the rates. Nothing in this
article shall be construed to specify the frequency of rate
filings.
(21) "Recorded period" means the historical period
from which data are taken to provide the basis for the proposed
rate. The recorded period shall be the most recent three calendar
years for which reliable data are available.
(22) "Supplementary rating information" means any
manual, rating schedule, plan of rules, rating rules,
classification systems, territory codes and descriptions, rating
plans, and other similar information used by the insurer to
determine the applicable premium for an insured. The term includes
factors and relativities, such as increased limits factors,
classification relativities, deductible relativities, premium
discount, and other similar factors and rating plans such as
experience, schedule, and retrospective rating. [determine whether
presupposes companies can do their own classification freedom; need
for it this section]
(23) "Supporting information" means:
(A) the experience and judgment of the filer and
the experience or information of other insurers relied on by the
filer;
(B) the interpretation of any other information
relied on by the filer;
(C) descriptions of methods used in making the
rates; and
(D) any other information required by the
department to be filed.
(24) "Unallocated loss adjustment expense" means the
industry's historic costs per exposure associated with the
adjustment of claims but not to specific claims as captured in
allocated loss adjustment expenses. These expenses are reported in
insurers' Annual Statements as "adjusting and other expenses."
(25) "Variable expense factor" means the sum of the
variable expenses, expressed as a percentage of the corresponding
direct written premium.
(26) "Variable expenses" consist of the following:
(A) commission and brokerage expenses incurred
(B) state premium taxes, licenses, and fees
incurred.
as reported in the Insurance Expense Exhibit, Section III-Texas
Direct Premium.
Sec. 3. RATE STANDARDS.
(a) Rates under this article shall be set in accordance with
the provisions of this section.
(b) In setting rates, an insurer shall consider:
(1) past and prospective loss experience inside the
state, and outside the state if the state data are not credible;
(2) the peculiar hazards and experiences of individual
risks, past and prospective, inside and outside the state;
(3) the insurer's own historical premium, exposure,
loss, and expense experience to the extent that it is actuarially
credible;
(4) catastrophe hazards within the state;
(5) operating expenses excluding disallowed expenses;
(6) investment income;
(7) a reasonable margin for profit; and
(8) any other relevant factors inside and outside the
state.
(c) Rates may not be excessive, inadequate, unreasonable,
or unfairly discriminatory for the risks to which they apply.
(d) In setting rates applicable solely to policyholders in
the state, an insurer shall use its own historical premium and loss
data, as well as its own data for expenses and for profit and
contingency factors. The commissioner may require an audit of the
insurer's historical premium and loss data. The insurer may
separately supplement its own historical premium and loss data with
external historical premium and loss data as necessary. The
commissioner may by rule establish requirements for reporting
historical premium and loss data under this subsection.
Sec. 4. DETERMINATION OF THE RATE INDEX.
(a) Rate index. The "rate index" shall be calculated for
each coverage, as defined in Section 2(3), as follows:
(1) The sum of:
(A) projected losses, as defined in Section 2(15)
of this article, plus
(B) projected allocated loss adjustment expenses
("ALAE"), as defined in Section 2(13) of this article; and plus
(C) projected unallocated loss adjustment
expense ("ULAE"), as defined in Section 2(16) of this article; and
plus
(D) projected fixed expenses, as defined in
Section 2(14) of this article.
(2) The sum of the calculation of subsection (a)(1)
will then be divided by the quantity 1.0 minus the variable expense
factor, as defined in Section 2(25) of this article, and the profit
load, as defined in Section 2(12) of this article, with the result
being the rate index.
(3) Stated as a formula:
Rate index = (projected losses + ALAE + ULAE + projected fixed
expenses)/
(1 - variable expenses - profit load)
(b) Catastrophe Adjustment. In those insurance lines and
coverages where catastrophes occur, the catastrophic losses of any
one year in the recorded period shall be replaced by a loading based
on an estimate of the expected long-term average annual catastrophe
claim costs per exposure. The Commissioner shall be responsible for
determination of the appropriate catastrophe loading.
(c) Trend Factor.
(1) Separate trend factors shall be calculated for
losses, allocated loss adjustment expenses, unallocated loss
adjustment expenses, and fixed expenses for each coverage covered
by this article.
(2) The trend factor shall be based on the average of
the two annual percentage changes during the three year recorded
period.
(3) Catastrophe losses, as defined by the Texas
Private Passenger Auto Statistical Plan, shall be excluded from the
loss trend calculations.
(4) The Commissioner may, upon the request of an
affected insurer or the Office of Public Insurance Counsel, specify
the manner in which loss data predating a specific change in law
shall be adjusted in affected lines to take such change in the law
into account. A specific change in law, as specified in the
subsection, may be either legislation or a judicial decision that
the Commissioner may reasonably anticipate will affect the loss
payouts of insurer issuing personal automobile or motor vehicle
policies.
(d) Class and Territory Relativities. Using standard
actuarial techniques and based on the actual loss data by territory
and driver classification for the recorded period, the Commissioner
shall adjust the rate index to rates for individual territories and
driver classes.
Sec. 5. RATE FILINGS. An insurer must file with the
commissioner all rates, supplementary rating information,
reasonable and pertinent supporting information for risks written
in the state, and all applicable rating manuals. The insurer shall
include in the filing any statistics or other information to
support the rates to be used by the insurer as required by the
commissioner by rule, including information necessary to evidence
that the calculation of the rate does not include disallowed
expenses. The insurer shall include in the filing policy fees,
service fees, and other fees that are charged under Article 21.35A
or Article 21.35B of this code.
Sec 6. RATE APPROVALS. (a) USE AND FILE.
(1) If an insurer's rate filing is less than or equal
to 5% above or below the rate index, the insurer's rate filing is
effective on the date specified by the insurer provided the filing
is made within 10 days of the effective date.
(2) Rates filed under this subsection are presumed to
be valid and in compliance with the requirements of this article.
However, if, after notice and hearing, the commissioner finds that
an insurer's filing under this subsection does not meet the
requirements of this article, the commissioner shall issue an order
that specifies how the filing fails to meet the requirements of this
article and states the date on which, within a reasonable period
after the order date, the insurer's filing is no longer in effect.
Rates filed by an insurer under this subsection shall remain in
effect until a final order disapproving such rates is issued by the
commissioner.
(b) FILE AND USE
(1) If an insurer's rate as specified in a rate filing
is over 5% but less than or equal to 10% above or below the rate
index, the insurer's rate filing is effective on the date specified
by the insurer but, except as provided in subsection 6(b)(3) below,
not earlier than the 30th day after the date the filing is received
by the commissioner.
(2) Within such 30 day period after receipt of the
filing, and after a hearing, the commissioner may disapprove a
filing under this Subsection. A hearing under this subsection may
be initiated by the Department or, if the Commissioner makes an
initial determination that a grievance states a legitimate prima
facie case and was filed in good faith, upon the motion of the
Office of Public Insurance Counsel.
(3) The commissioner may approve a filing by written
or electronic notification to the filer at any time before the 30th
day after the date of receipt by the commissioner or before the
effective date specified by the insurer in the filing. The new rate
may take effect on the receipt of the notice of the commissioner's
approval.
(c) PRIOR APPROVAL
(1) If an insurer's rate as specified in a rate filing
is over 10% above or below the rate index, the insurer's rate filing
must be approved by the commissioner before the insurer may use such
rates. An insurer making a filing under this subsection bears the
burden to prove that relevant markets are inadequate for the risks
insured, that failure to approve the filing will cause a lack of
availability in the relevant market and that approval of the filing
will not adversely affect the financial condition of the insurer.
Upon approval by the commissioner, the insurer's rate filing under
this subsection is effective on the date specified by the insurer or
upon receipt of the commissioner's approval, whichever is later.
(2) Notwithstanding Subsection 5(c)(1) above, a
filing under this subsection is deemed approved on the 60th day
following the Commissioner's receipt of the filing unless, prior to
60th day following receipt, the commissioner notifies the insurer
in writing that the filing has been disapproved or that additional
information is required. The commissioner's written notification
disapproving a filing under this subsection must specify how the
filing fails to meet the requirements of this article. If the
Commissioner finds that additional information regarding the
filing is required, the Commissioner shall act within 30 days after
the insurer's response to that request.
(3) An insurer whose filing under this subsection has
been disapproved by written notification from the commissioner may
request a hearing to appeal the disapproval, and the commissioner
shall schedule such hearing within 20 days of receiving the notice
of appeal.
(4) With respect to any filing in effect under this
subsection, an aggrieved insured or the public insurance counsel
may make a written application to the commissioner for a hearing on
the filing. The application must specify the grounds on which the
applicant bases the grievance. If the commissioner finds that the
application is made in good faith, that the applicant would be so
aggrieved if the grounds in the application are established, and
that those grounds otherwise justify holding the hearing, the
commissioner shall hold a hearing not later than the 30th day after
the date of receipt of the application. The commissioner shall give
at least 10 days' written notice of the hearing to the applicant and
to the insurer that made the filing in question. If, after the
hearing, the commissioner finds that the filing does not meet the
requirements of this article, the commissioner shall issue an order
specifying how the filing fails to meet the requirements of this
article and stating the date on which, within a reasonable period
after the date of the order the filing is no longer in effect. The
commissioner shall send copies of the order to the applicant and to
each affected insurer.
(d) CONTINUATION OF PRIOR RATES. From the date of filing of
the rates with the commissioner to the effective date of the new
rates in accordance with section 6 of this article, the insurer's
previously filed rates that are in effect shall remain in effect.
Sec. 7. RATE HEARINGS. Subject to Chapter 40 of this code,
Chapter 2001, Government Code, applies to all hearings on rates
conducted under this article. To the extent of any conflict between
this article and Chapter 2001, Government Code, the provisions of
this article prevail.
Sec. 8. APPEAL. Any insurer or other party at interest as
described by Section 7 of this article aggrieved by an order of the
commissioner issued under this article may, not later than the 30th
day after the date on which the commissioner issued the order,
appeal the order in accordance with Subchapter D, Chapter 36 of this
code.
Sec. 7. GENERAL PROVISIONS (a) To avoid circumvention of
the rating program established by this article and to stop the
deregulation of the motor vehicle insurance market by transfer of
risks to county mutual insurance companies, a county mutual
insurance company may not write private passenger automobile
insurance for any insured at a rate including any applicable policy
fees that, after the application of any discount available to the
insured is lower than the highest rate permissible under the file
and use procedure established in Section 6(b) of this article.
(b) Nothing in this Act shall be construed to require an
insurer to accept a specific risk or to issue a specific individual
policy.
Sec. 8. Subsection (f), Article 5.01, Insurance Code, is
amended to read as follows: (f) Notwithstanding Subsections (a)
through (d) of this article, on and after June 1, 2003 [March 1,
1992], rates for motor vehicle insurance in this state are
determined [as provided by the flexible rating program adopted]
under Article 5.141 [Subchapter M] of this code [chapter].
Sec. 9. This Act takes effect September 1, 2003.
Sec. 10. The importance of this legislation and the crowded
condition of the calendars in both houses create an emergency and an
imperative public necessity that the constitutional rule requiring
bills to be read on three several days in each house be suspended,
and this rule is hereby suspended.