Legislative Reform: Reform or Be Reformed

1. Legislative Reform:Reform or Be Reformed 2003 CAS ANNUAL MEETING Presented by Steven G. Lehmann, FCAS, FSA, FCIA, MAAA Pinnacle Actuarial Resources, Inc. www.pinnacleactuaries.com November, 2003

2. New Jersey Senate Bill 63 Passed June, 2003 • Texas Senate Bill 14 Passed June, 2003

3. New Jersey S.B. 63 “Take-All-Comers” Provisions • Take-all-Comers phased out in 2009 • Exemption for insurers in any territory where growth exceeds “percentage growth factor” (5% first year, decreases by 1% per year) • Creates “Voluntary” Tier in PAIP for insureds denied coverage because of growth factor exemption

4. “Take-All-Comers” Provisions(continued) • Amends tier rating provision to allow insurers to assign insureds to non-standard tier if > 4 motor vehicle points (was 6)

5. New Jersey S.B. 63 Prior Approval Procedures • Commissioner must make determination within 90 days to approve or not • If Commissioner fails to act in 90 days, goes to Office of Administrative Law • Commissioner must adopt findings of ALJ

6. New Jersey S.B. 63 Expedited Filings • Raises ceiling from 3% to 7% for overall rate increase • Raises ceiling from 5% to 10% for any coverage • Allows insurers to double these percentages if no rate increase for 12 months

7. New Jersey S.B. 63Other Provisions • Creates new policy option with limited benefits for low income drivers • Raises min. deductible for comp and collision from $500 to $750 • Excess profits test period increased from 3 years to 7 years

8. Other Provisions (cont’d) • Insurance fraud reforms • Excess medical reimbursement for PIP claims greater than $75,000 eliminated for all policies issued on or after January 1, 2004 • Reimbursement for Excess PIP claims prior to January 1, 2004 transferred to PLIGA.

9. Key NJ Insurance Dept.Rules & Bulletins - 2003 • Bulletin 03-21 PIP Coverage limits above $75,000 • Proposed Regulation: Rate Process For Limited Rate Changes • Proposed Regulation: Rate Filing Requirements

10. New Jersey Bulletin 03-21 • Insurers will assume risk for PIP benefit limits above $75,000 up to $250,000 per person/per accident effective January 1, 2004

11. New Jersey Bulletin 03-21 • Filing Options: • No change in rates • Increase PIP rates up to 15% with offsetting reductions to other coverages to produce revenue neutral filing

12. Proposed Reg: Rate Process for Limited Rate Changes – NJAC 11:3-16B • Formerly known as “Expedited Process” • Amending thresholds from 3% to 7% for overall change and 5% to 10% for individual coverages • Technical changes • Reducing # of years in age-to-age from 7 to 5 • Trend factors must be based on paid claims

13. Rate Process for Limited Rate Changes • Other changes to coordinate with changes to rate filing regs

14. Proposed Changes to NJ Rate Filing Regs- NJAC 11:3-16 • Changes affect standard ratemaking methodology • Eliminates Clifford Formula • Substitutes ROE method • Initial allowed ROE of 12% • Min. premium-to-surplus ratio 2 – 1 or insurers actual

15. Texas Senate Bill 14June, 2003

16. Texas Senate Bill 14Homeowners Rate Regulation • Prior Approval until December 1, 2004 • Rate standards and filing requirements will apply to all companies, including Lloyds • All companies required to make filings within 20 days of Governor’s signature • Commissioner authorized to order rate reductions

17. Texas Senate Bill 14Homeowners Rate Regulation • Companies had 10 days to appeal Commissioner’s Order • Commissioner must hold hearings within 30 days of appeal • Burden of proof on companies • If court upholds Commissioner, insurer must give refunds plus interest

18. Texas Senate Bill 14Homeowners Rate Regulation Other Provisions: • Disallowed expenses (admin. >110% of industry median, lobbying, bad faith, fines for criminal violations, etc.) • Quarterly report of losses, premiums, and market share • Credit scoring limitations

19. Texas Senate Bill 14Homeowners Rate Regulation Other Provisions (cont’d) • File and use with 30 day deemer after December 1, 2004. Note: Refunds can be ordered by the Commissioner • Insurers required to file all rates and supporting materials including certification that rates are based on sound and verifiable actuarial principles and not unfairly discriminatory

20. Texas Senate Bill 14Homeowners Rate Regulation Other Provisions (cont’d) • OPIC or any interested party can request rate hearing on rate changes • Territories – Cannot subdivide county unless rates for any subdivision doesn’t exceed other subs by more than 15% • Prior approval of Policy Forms • Underwriting guidelines must be filed

21. Texas Senate Bill 14Homeowners Rate Regulation Other Provisions (cont’d) • Withdrawal plan must be filed if insurer plans to reduce premium volume by 50%

22. Texas Senate Bill 14Auto Rate Regulation • Rates are file and use after December 1, 2004 • Policy Forms require prior approval • Commissioner can order refunds if he/she finds rates excessive

23. Texas Senate Bill 14Auto Rate Regulation (cont’d) • County Mutuals and Lloyds no longer exempt from rate regulation after December 1, 2004 • County Mutuals regulated for commercial auto effective immediately • Small County Mutuals writing high-risk drivers allowed more flexible filing standards

24. Texas Senate Bill 14Auto Rate Regulation (cont’d) • Territories – Can’t subdivide a county unless rates for any subdivision do not exceed other subs by more than 15% • Flex rating (± 30% of benchmark) is allowed until December 1, 2004. Any change in rates must be filed with Dept. and cannot be excessive, inadequate or unfairly discriminatory

25. Texas Senate Bill 14Auto Rate Regulation (cont’d) • Underwriting guidelines must be filed • Withdrawal plan must be filed if insurer plans to reduce premium volume by 50% or more