Schedule Rating Plans in Property and Casualty Programs

Issued and entered June 30, 2000 by Frank M. Fitzgerald, Commissioner of Financial and Insurance Services

On April 3, 2000, the Michigan Insurance Bureau, Financial Institutions Bureau, and Securities Division became the Office of Financial and Insurance Services.

As a result of compliance audits performed by the Office of Financial and Insurance Services, Division of Insurance ("Division"), the Division has become aware that some insurers are using schedule rating plans and individual risk premium modification rating type plans ("rating plans") to assign credits and debits without documentation or justification.

The Division encourages price competition, but is concerned about solvency and the possibility of unfair discrimination. The Division strives to maintain a level playing field with insurers playing by the same rules.

These rating plans are subject to the provisions of Chapter 24 and Chapter 26 of the Michigan Insurance Code ("Code"), which govern casualty and property rates. They are also subject to provisions of the casualty insurance rating administrative rules, R500.1201 et. seq. and the fire and inland marine insurance rating rules, R500.1301 et seq.

MCL 500.2403(1)(d); MSA 24.12403(1)(d), for example, provides that a differential between casualty rates requires reasonable justification supported by a reasonable classification system, by sound actuarial principles, and by actual and credible loss and expense statistics, or in the case of new coverages and classifications, by reasonably anticipated loss and expense experience. This section also states that a rate for a casualty coverage is unfairly discriminatory in relation to another rate for the same coverage, if the differential between rates is not reasonably justified by differences in losses, expenses, or both, or by differences in the uncertainty of loss for the individuals or risks to which the rates apply. MCL 500.2603(1)(d); MSA 24.12603(1)(d) contains similar provisions for property rates.

MCL 500.2406; MSA 24.12406 (casualty) and MCL 500.2606; MSA 24.12606 (property) require all rates, rating plans, rules, and modifications to be filed with the Division. MCL 500.2412; MSA 24.12412 (casualty) and MCL 500.2612; MSA 24.12612 (property) provide that an insurer shall not issue a contract except in accordance with filings which are in effect.

In addition, the Commissioner has authority under provisions of MCL 500.438(3); MSA 24.1438(3) to address inquiries in relation to any activities of an insurer. Since the Division will be making inquiries in the future concerning an insurer's use of these rating plans, insurers need to keep records justifying why a policyholder received a particular credit or debit.

Without the justification specified above, the Division cannot verify that credits or debits are not unfairly discriminatory. In the past, when asked for copies of documentation in an insurer's file for sample risks, some insurers have been unable to provide any. Such a lack of documentation gives the appearance of arbitrary discounts, and may indicate unfairly discriminatory rates.

The Division has also seen a few extremely large ranges of schedule rating and individual risk premium modification credits and debits where insurers cannot provide statistical support for their plan. Ranges of 40% or even 50% have been observed. This means that some insurers are charging rates that vary 80% or 100% from filed rates without the statistical support required by the Code and Administrative Rules. It also raises questions as to the adequacy of rates being charged.

This bulletin will clarify that insurers are expected to be in compliance with the following requirements no later than September 30, 2000:

1. If an insurer uses a schedule rating or individual risk premium modification rating plan, it must be filed with the Division, and credits or debits granted must be in accordance with an insurer's filing.
   
   
2. If an insurer files or has filed a rating plan permitting credits and debits that exceed plus or minus 25%, the filing must include actual and credible loss statistics that meet the requirements of Section 2403(1)(d) and/or Section 2603(1)(d).
   
   
3. Insurers shall maintain documentation in each policyholder file regarding rating plan credits or debits assigned for a period of five years. The documentation shall identify each characteristic in the insurer's filed schedule rating plan, assign a credit or debit score to each characteristic, and provide justification for each score, such as identification of the business practices or conditions that support the score. Upon request, an insurer shall forward copies of documentation to the Division.

If an insurer's current filings are not in accordance with the above requirements, amended filings are due by September 30, 2000.

Any questions regarding this bulletin should be directed to:

Michigan Division of Insurance
Rates and Forms Audit
611 West Ottawa Street
P.O. Box 30220
Lansing, MI 48909-7720

Phone: (517) 373-0242
Toll Free (877) 999-6442

This bulletin, issued under Section 7(h) of the Administrative Procedures Act, MCL 24.207(h); MSA 3.560(107), is incorporated as a part of the filing instructions contained in the property and liability insurance filing procedures manual and should be kept with that manual.