OGC Opinion No. 08-07-16

The Office of General Counsel issued the following opinion on July 21, 2008, representing the position of the New York State Insurance Department.

RE: Disapproval of a Loss History Rating Plan as an Experience Rating Plan

Question Presented:

May a rating plan for homeowners policies establish classifications based on the number of losses sustained by insureds?

Conclusion:

Yes. A rating plan for homeowners policies may establish a classification plan based on the number of losses of the insureds (zero, one, two, or more) where the plan establishes classification and corresponding rates that reflect the collective loss experience of all insureds in a class, not the experience of any single insured.

Facts:

The inquirer submitted a new filing to the Property Bureau of the Insurance Department for approval of a new Loss History Rating Plan (hereinafter, “Plan”) for use with the inquirer’s Homeowners Policy Program and Mobilehome Supplement to the Homeowners Policy Program, which is based on the collective loss experience of the classes of insureds having 0, 1, 2, 3, or 4 or more chargeable losses that occur during a three year history period. In other words, one class would be all insureds with zero losses, the next classification one loss, and so forth. The inquirer states in the filing that the Plan introduces a refinement, which better recognizes the loss history of a risk, for both property and liability coverages, in determining the appropriate premium for a new or renewal policy. The inquirer also states that the new rule introduces rating factors to be applied to the base premium of the policy being rated, to recognize the number of eligible prior losses of an insured or applicant insured during the preceding three-year period.

The Property Bureau denied the filing on the grounds that the proposed Plan, providing for the application of stand-alone rating factors based on an insured’s number of eligible losses during a particular period, is a form of experience rating that is prohibited for personal lines policies pursuant to § 161.8(a) of 11 NYCRR § 161 (Reg. 129).

The inquirer argues that the Plan is not an “experience rating plan” or “loss rating plan” like those used in commercial lines that rely on an analysis of the actual past loss experience of the individual insured as defined in 11 NYCRR § 161.1(g) and (n), but more like a classification plan used for personal automobile policies, such as ISO’s Personal Auto Safe Driver Insurance Plan (SDIP). The inquirer asserts that the Plan does not reflect the actual loss experience of any single insured in the development of any modification or adjustment of a base rate, but rather establishes classification relativities based on the loss experience of all insureds in classes having zero, one, two, or more losses.

Analysis:

11 NYCRR § 161.1(g) is relevant to the query. That provision defines “experience rating plan” as:

Neither the Insurance Law, nor the regulations promulgated thereunder, permit experience rating of any personal lines insurance. Specifically, 11 NYCRR § 161.8(a), which prohibits the implementation of an experience rating plan in rating personal lines policies, states:

The Superintendent promulgated Regulation 129 “in response to affordability and availability problems …in connection with commercial risk insurance, professional liability insurance, and public entity insurance….” 11 NYCRR § 161.0(a). As noted above, the Regulation prohibits experience rating in the rating of personal lines policies.¹

The inquirer argues that the Plan does not use the actual loss experience of any single insured in the development of any modification or adjustment of a base rate, but simply establishes classification relativities based on the loss experience of all insureds in classes having zero, one, two, or more losses. The Department’s Office of General Counsel agrees that the proposed Plan is a classification system, and not experience rating, because it establishes classifications and corresponding rates that reflect the collective loss experience of all insureds in a class, not the experience of any single insured. The definition of experience rating plan pursuant to Regulation 129 requires an experience rating plan to be “based on the actual past loss experience of the insured.” A true experience rating plan considers an individual insured’s loss experience and makes rate adjustments based on that experience, but it does not, as here, consider the loss experience of a class of insureds, all of whom will have the same rating factor applied. That is a classification plan.

Accordingly, the proposed Plan may be permissible under Regulation 129.

For further information you may contact Associate Attorney Elizabeth Barrett at the New York City Office.

¹ Note, however, that pursuant to N.Y. Ins. Law § 2334 (McKinney Supp. 2008) and 11 NYCRR §169.1 (Regulation 100), auto insurers may establish merit rating plans, which are systems of rules, varying by company, for imposing insurance rate surcharges and credits, based upon an individual insured’s past accident or violation record.