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You are here: Home . rules . 2004 . 0903B-059
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Subchapter F. Inland Marine Insurance and Multi-Peril Insurance

28 TAC § 5.5005

The Texas Department of Insurance proposes new §5.5005, which concerns the rating of commercial multi-peril policies. In 1992, the State Board of Insurance selected Article 5.13-2 of the Texas Insurance Code as the regulatory scheme for regulating commercial multi-peril policies and adopted §5.9101 to govern the regulation of forms and rates for commercial multi-peril policies. Senate Bill (SB) 14, enacted by the 78 th Legislature, Regular Session, 2003, amended various provisions of Chapter 5 of the Texas Insurance Code, including Articles 5.13 and 5.13-2. These legislative amendments added several lines of insurance previously subject to prior approval rate regulation to file and use rate regulation under Article 5.13-2. Additionally, these amendments eliminated all regulatory procedures for policy forms and endorsements in Chapter 5, except for Article 5.13-2 §8 which provides specific procedures for regulating commercial policy forms and endorsements and provisions relating to the regulation of workers' compensation policy forms and endorsements. In accordance with these amendments commercial multi-peril policy forms are subject to Article 5.13-2. To conform to the regulatory changes enacted by SB 14, new §5.5005 is being proposed simultaneously with the proposed repeal of §5.9101. Notice of the proposed repeal appears elsewhere in this issue of the Texas Register .

Proposed §5.5005 is necessary to reflect the amendments to Article 5.13-2 of the Insurance Code and to provide that all insurers including Lloyd's plans, reciprocals, and interinsurance exchanges (hereafter "Lloyds and reciprocals") will be subject to rate regulation for commercial multi-peril insurance. It is the department's interpretation that the legislative intent of certain amendments to Article 5.13-2 is to provide uniform rate regulation of insurers. Prior to SB 14, county mutual insurance companies were exempt from rate regulation for commercial automobile insurance. SB 14 removed that exemption for county mutual insurance companies effective June 11, 2003. The Legislature intended to create a more competitive commercial automobile insurance market by uniformly regulating commercial automobile rates for all insurers. The proposal is consistent with the amendments to Article 5.13-2 in that all authorized insurance companies, including Lloyds and reciprocals, that include commercial automobile coverage in a commercial multi-peril policy are subject to the rate regulatory provisions of Article 5.13-2. Article 5.13-2 §3 provides that Lloyds and reciprocals are not subject to rate filing requirements with respect to commercial property and inland marine insurance. However, in light of the Legislature´s clear intent in SB 14 to place all authorized insurers writing commercial automobile insurance under rate regulation, it does not follow that the exemption in §3 is intended to allow Lloyds and reciprocals to achieve de facto deregulation of commercial automobile rates by combining commercial automobile coverage with a line of insurance that would otherwise be exempt from rate filing. Commercial multi-peril insurance is reported as a separate line of insurance in the Fire and Casualty Annual Statement Form 2, Page 14 Texas Supplement, Exhibit of Premium and Losses, and it is further defined as a separate line of insurance in 28 TAC §7.1 803 (a)(2)(G). Although commercial multi-peril insurance constitutes a separate and distinct line of insurance, it is essential to regulate a combination of the lines of insurance subject to Article 5.13-2 in the manner set forth in that article. However, the department recognizes that pursuant to existing §5.9101, Lloyds and reciprocals are not subject to rate filing requirements for lines of insurance specified in the rule when those lines are combined to create a multi-peril policy. In lieu of the exemption from rate filing in §5.9101, proposed §5.5005 requires Lloyds and reciprocals to file a schedule of the amounts (hereafter "informational filing") that policyholders or applicants are to be charged. Requiring Lloyds and reciprocals to make informational filings for all lines of insurance contained in a multi-peril policy, including commercial property and inland marine lines of insurance, is necessary to enable the department to compare rates charged by these insurers with those charged by the rest of the industry. Such comparison will allow the department to determine if more information is needed to determine if rates are fair, just, reasonable, adequate and not excessive. Since the commercial multi-peril rate may be a blended rate, the department would not be able to discern whether the rates are fair, just, reasonable, adequate and not excessive without information on all of the lines of insurance contained in the policy. In recognition of the intent of the SB 14 legislation, the informational filing requirements apply only to commercial multi-peril policies filed by a Lloyds or reciprocal that contain the lines of insurance specified in the proposed section and do not apply if commercial automobile insurance or other lines not specified are included.

Proposed subsection (a) sets forth the purpose of the section. Proposed subsection (b) defines terms used in the section. Proposed subsection (c) states the general rule that the rates for commercial multi-peril policies are governed by the provisions of Article 5.13-2 except as provided in subsection (d). Proposed subsection (d) requires Lloyds and reciprocals to file a schedule of amounts policyholders or applicants are to be charged for the policy for all the lines of insurance that are included in a commercial multi-peril policy as described in that section. Proposed subsection (e) provides that Lloyds and reciprocals shall retain the statutory exemption from rate filings for commercial property and inland marine lines of insurance provided these lines are not combined with other lines of insurance in a commercial multi-peril policy.

Marilyn Hamilton, Associate Commissioner, Property and Casualty Program, has determined that for each year of the first five years the proposed section will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Ms Hamilton has determined that for each year of the first five years the section is in effect, the public benefits anticipated as a result of the proposed section will be that the regulation of commercial multi-peril policies will conform to the regulatory changes to Article 5.13-2 of the Insurance Code as enacted by SB 14. Additionally, the proposed section will promote the public welfare and price competition among insurers through the regulation of insurance rates that prohibits excessive, unfair, and inadequate rates.

Ms. Hamilton has determined that the cost to insurers complying with the proposed section will depend on whether an insurer is a Lloyds or reciprocal. All of the insurers who currently write commercial multi-peril policies, except for Lloyds and reciprocals, file with the department for each line of insurance included in a commercial multi-peril policy all rates, supplementary rating information, and pertinent supporting information. Currently, Lloyds and reciprocals do not file rates for commercial property and inland marine insurance, but have filed rates for each other line of insurance included in a commercial multi-peril policy. Under §5.9101 Lloyds and reciprocals did not have to file rates for commercial multi-peril policies. Since the new section does not impose any new rate filing requirements on the insurers who are currently making rate filings in accordance with Article 5.13-2 there will not be any new compliance costs for these insurers as a result of the proposal. However, Lloyds and reciprocals may incur compliance costs associated with proposed §5.5005 because they are currently exempt from the commercial multi-peril rate filing requirements under §5.9101. In recognition of the Article 5.13-2 amendments, proposed §5.5005 provides a more uniform system of rate regulation for commercial multi-peril policies and does not provide an exemption to Lloyds and reciprocals.

Ms. Hamilton has further determined that the estimated economic cost to Lloyds and reciprocals complying with the proposed section will vary depending on whether the Lloyds or reciprocal chooses to include only the lines of insurance specified in subsection (d) of the proposed section in their commercial multi-peril policies or write broader commercial multi-peril policies that combine additional lines of insurance that are not specified in subsection (d). Lloyds and reciprocals that choose to write commercial multi-peril policies that combine only those lines of insurance specified in subsection (d) of the proposed section will be required to file a schedule of the amounts ("informational filing") that policyholders or applicants are to be charged. The estimated economic cost for Lloyds and reciprocals to comply with this informational filing requirement is approximately $79.60 for each filing. This estimate includes 8 hours for an insurance filing clerk to copy the schedule of rates and submit an informational filing to the department. According to the Texas Work Force Commission´s current employment and wage estimates, the median wage for insurance file clerks is $9.95 per hour.

Lloyds and reciprocals that choose to combine additional lines of insurance that are not specified in subsection (d) in a commercial multi-peril policy will be subject to the rate regulatory provisions of Article 5.13-2 for commercial multi-peril policy rates. The estimated economic cost for Lloyds and reciprocals to comply with the proposed section may differ substantially depending on the particular circumstances of the insurer. These factors include but are not limited to whether or not the insurer is currently writing business on both a monoline and commercial multi-peril basis, whether the insurer currently utilizes the services of an actuary, and whether the insurer utilizes loss costs published by an advisory organization. It is therefore difficult to estimate likely costs with any degree of precision. An estimate of the possible range of costs to submit a rate filing in accordance with Article 5.13-2 will vary depending on the hourly fee for an actuarial consultant and on the actual services needed and the circumstances of the Lloyds or reciprocal. According to the Texas Work Force Commission´s current employment and wage estimates, the median wage for an actuary is $33.75 per hour but the hourly wage or fee for a consulting actuary may be $220 per hour depending on the experience, certification, or training of the individual actuary. The department has determined that the cost estimate may range from $699 which includes 16 hours of actuarial services at $33.75 per hour and 16 hours at $9.95 per hour for an insurance file clerk to compile a rate filing to approximately $9,000 which would include 40 hours of actuarial services at $220 per hour and 20 hours at $9.95 per hour for an insurance file clerk to compile a rate filing. This estimate for new rate filings for Lloyds and reciprocals may in some instances be lower because some Lloyds and reciprocal insurers will already have their rates calculated by actuaries or have a general idea of the rate th e y plan to use and will not require additional actuarial services. Lloyds and reciprocal insurers whose current rates have already been calculated by actuaries may need only the 16 hours of services of an insurance file clerk to prepare and submit the rate filing to the department which would be a cost of $159.20 for each new filing. It is neither legal nor feasible to waive the requirements of the section for small or micro-businesses because Article 5.13-2 of the Texas Insurance Code provides that all insurers are required to comply with the rate filing requirements set forth in Article 5.13-2 for the lines of insurance that may be contained in a commercial multi-peril policy.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on October 18, 2004 to Gene C. Jarmon, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to Marilyn Hamilton, Associate Commissioner, Property and Casualty Program, Mail Code 104PC, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing should be submitted separately to the Office of the Chief Clerk.

The new section is proposed under the Insurance Code Articles 5.13-2 and 5.98 and §36.001. Article 5.13-2 provides the rate filing requirements for lines of insurance that may be contained in a commercial multi-peril policy. Article 5.98 provides that the Commissioner may adopt reasonable rules which are appropriate to accomplish the purposes of Chapter 5. Section 36.001 provides that the Commissioner of Insurance may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

The following articles are affected by this proposal: Insurance Code Articles 5.81 and 5.13-2

§5.5005. Rates for Commercial Multi-peril Policies.

(a) The purpose of this section is to provide a rate regulatory procedure for commercial multi-peril policies.

(b) The following words and terms, when used in this section, shall have the following meaning unless the context indicates otherwise. -- Rate--The cost of insurance per exposure unit, whether expressed as a single number or as a prospective loss cost, with an adjustment to account for the treatment of expenses, profit, and individual insurer variation in loss experience, including any application of individual risk variations based on loss or expense considerations.

(c) Rates for commercial multi-peril policies shall be subject to the rate regulatory provisions of Article 5.13-2 of the Texas Insurance Code, except as provided in subsection (d).

(d) For a commercial multi-peril policy as described in this subsection, Lloyd's plans, reciprocals, and interinsurance exchanges shall file with the department a schedule of the amounts to be charged policyholders or applicants and the amounts of any rate changes for all lines of insurance that are included in the commercial multi-peril policy, including commercial property and inland marine lines of insurance. The schedule shall include any amount charged, including "rates", "policy fees", "service fees", and "other fees" that are charged or collected under Article 21.35B of the Texas Insurance Code. Commercial multi-peril policies that contain lines of insurance other than those specified in paragraphs (1) - (6) of this subsection shall be subject to the requirements of subsection (c) of this section. For the purpose of receiving a reduction in filing requirements under this subsection, a commercial multi-peril policy filed by a Lloyd's plan, reciprocal, or interinsurance exchange may contain some combination of only the following lines of insurance:

(1) general liability;

(2) commercial property;

(3) commercial casualty, including boiler and machinery, commercial crime, commercial glass, and professional liability; but excluding commercial automobile, fidelity, surety and guaranty bonds, financial guaranty, and workers compensation;

(4) medical professional liability;

(5) inland marine; and

(6) garage insurance, including all coverages and endorsements included in the Texas Garage Policy, except for those coverages specifically rated on the basis of risk characteristics of the automobile or the person driving.

(e) Nothing in this section shall be construed to preclude the exemptions for Lloyd's plans, reciprocals, and interinsurance exchanges in Insurance Code Article 5.13-2 §3(a)(3) from rate filing for commercial property and inland marine lines of insurance, provided these lines are not included or contained in a commercial multi-peril policy.



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