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California Department of Insurance Requires Underwriting Rules to be Made Public

The California Department of Insurance (CDI) issued a legal opinion (“Opinion”) on August 10 requiring underwriting rules included in property and casualty (P&C) rate applications to be made public, even if such rules contain confidential and/or proprietary information. The Opinion, which we understand was issued to avert consumer litigation against the CDI, could have far-reaching effects on the P&C market in California and beyond, particularly for InsurTech innovation.

Summary of the Opinion

The Opinion defines an “underwriting rule” as “any rule or factor used by an insurer in the process of examining, accepting, or rejecting insurance risks, and classifying those risks selected in order to charge the proper premium for each” and to include eligibility guidelines. The Opinion reasons that underwriting rules are subject to public inspection because (i) California law requires all information provided to the Commissioner to be made available for public inspection, and (ii) underwriting rules are provided to CDI to “evaluate the reasonableness of a proposed rate in relation to the specific risks to be insured and coverages to be offered.”

If an insurer fails to submit its underwriting rules with each rate application when requested by CDI, or submits such rules as confidential and not subject to public disclosure, the Opinion finds that the application would “not include and make available for public inspection all information required by the Commissioner to evaluate fully the requested rate change” and that the public “would be improperly denied the full statutorily guaranteed…period to analyze a complete rate application.” Accordingly, the CDI could deem such an application “incomplete,” meaning that the required public notice period would not be triggered and the application would not move forward.

Significant Policy Shift

The Opinion resolves the question of whether underwriting rules are subject to public record requests, whether made by consumers or competitors. Apparently, the CDI has been struggling with this issue for some time, and the Opinion marks a considerable shift in CDI policy. The CDI previously treated P&C underwriting rules as confidential provided they were marked “confidential,” “proprietary” or “trade secret” unless and until a request for such information was made. This had remained the CDI’s position even after Proposition 103 was enacted in 1988.

Citing the benefits of transparency to consumers and insurers alike, a CDI press releaseannouncing the Opinion states that the “public has a right to know how insurers choose who is eligible for coverage” and the Opinion will provide the transparency necessary to “let consumers know if they’re being treated fairly by their insurers.”

Commercial Impact - InsurTech

The Opinion’s potential effect on insurers and the California P&C market overall could be significant, especially for the continued growth of InsurTech. The decision could discourage the launch of some new types of rating models and products in California if the CDI will not protect the intellectual property of insurers and/or their innovation partners. It also remains to be seen whether the CDI’s rationale in the Opinion—e.g., providing transparency necessary to determine “fair” treatment—could have wider implications.

In addition, consumer groups can cite the Opinion in their ongoing attempts to persuade state insurance regulators in other states (and the NAIC) to require public disclosure of underwriting rules and other information supporting rate applications such as “Big Data.” Other states now might find those arguments more persuasive.

©2018 Drinker Biddle & Reath LLP. All Rights Reserved

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About this Author

John Finston, Insurance Lawyer, Drinker Biddle
Partner

John F. Finston is a former General Counsel and Deputy Insurance Commissioner for the State of California who advises clients on insurance-related financial transactions, with a focus on highlighting and resolving insurance regulatory issues.

John’s practice involves representing reinsurance companies, insurance companies and insurance associations in mergers and acquisitions, transactional business restructuring, insolvency, and regulatory matters. He has extensive experience in transactional matters, and frequently advises...

415-591-7574
Theresa Fitzgerald, Drinker Biddle, insurance lawyer
Counsel

Theresa M. Fitzgerald has advised clients on a wide spectrum of insurance regulatory issues for more than 25 years. Her experience includes providing guidance to life, property/casualty, health, and title insurers and related entities on operational issues, regulatory filings and marketing practices. Theresa represents clients in obtaining regulatory approval of inter-affiliate transactions, acquisitions, and other holding company matters, as well as in the formation and licensing of insurance companies, and other transactional matters. She also performs compliance reviews for insurers and insurance producers and provides assistance in the development of compliance manuals.

Before returning to private practice, Theresa served for eight years as staff counsel for the California Department of Insurance, focusing on corporate affairs and conservation/liquidation matters, and for the Hawaii Insurance Division, handling property/casualty insurance, captive insurers, and legislative matters.

(415) 591-7573
Dan Brown, insurance lawyer, Drinker Biddle
Partner

Dan Brown represents insurance companies, agents and brokers, and others in all aspects of the admitted, exempt, and surplus lines insurance markets in the United States. This includes advising alien or foreign insurers on how to comply with various state laws in placing business; advising insures on exempt and specialty lines such as marine, aviation, and transportation risks; advising producers on licensing, placement and premium tax issues; and advising insureds on coverage and placement issues. Dan advises participants in the London market on how to...

(415) 591-7585
H. Michael Byrne, Insurance Lawyer, Drinker Biddle, New York
Partner

Michael Byrne* has extensive insurance transactional and regulatory experience. He advises U.S. and international re/insurers, investors, start-ups and producers on a broad range of matters including obtaining regulatory approvals for M&A, change of control and affiliate transactions, forming, licensing and structuring compliant business operations, drafting and negotiating agreements, and providing strategic advice on complex and cutting edge issues.

Mike is a leader in the excess and surplus lines and nonadmitted market,...

212-248-3182
Daniel McCarty, Drinker Biddle, insurance lawyer
Associate

Daniel P. McCarty advises U.S. and international insurers on a wide range of insurance regulatory and corporate matters. He has policymaking and regulatory experience on issues including InsurTech, reinsurer and surplus lines regulation, producer licensing and the federal government’s involvement in insurance. Daniel actively monitors state and federal legislative developments in a variety of areas, with particular interest in developments related to the National Association of Registered Agents and Brokers, the Federal Insurance Office, the Terrorism Risk Insurance...

(212) 248-3251