The Impact of Reinsurance on Homeowners Insurance Rates
Most of our posts discuss disputes involving specific claims or specific insurance or reinsurance contracts. But sometimes disputes arise in the regulatory context. This post is about the cost of catastrophe reinsurance protection, which factors into homeowners insurance rates rates used to develop the premiums charged to policyholders. This is especially relevant in states where natural catastrophes like hurricanes take place.
The premiums insurance companies charge policyholders are based on rate analyses and rate filings made by the insurance company to that insurance company’s home state insurance regulator. Rate filings have many attributes, including analyses of loss and premium data, costs of insurance, the time in which claims are noticed and ultimately paid and myriad other factors. Different states have different rules on whether a rate filing can be used upon filing or whether prior approval is necessary. When rate filings are challenged by the regulator an administrative hearing generally occurs. The final result of that hearing (the insurance regulator’s final determination) generally may be challenged in court. The regulator’s determination, however, is difficult to overturn given that the law in most states grants great deference to administrative determinations.
In Commissioner of Insurance v. North Carolina Rate Bureau, No. COA 15-402, (N.C. Ct of App. Aug. 2, 2016), the state rating bureau filed for new homeowners rates and included a provision for the net cost of catastrophe reinsurance because of the proximity of the state to the coast. North Carolina law allows for property insurance rates to include a provision to reflect the cost of reinsurance to protect against catastrophic exposure within the state. The Insurance Commissioner rejected the rate filing and a hearing was held with expert testimony. There were multiple issues, but on the reinsurance issue the focus was on whether the Commissioner erred in determining the net cost of reinsurance to be included in the rates.
The rating bureau’s filing included a provision for the net cost of reinsurance at 17.5% of premium based on an analysis performed by its expert. The Insurance Department’s witnesses determined that the rating bureau’s model was overstated and not reflective of the reinsurance market in North Carolina. The Commissioner rejected the rating bureau’s net cost provision and ordered a net cost of 10% of premium. The Commissioner’s determination included an explanation why the rating bureau’s methodology was rejected, including that the expert, an economist, had not discernible background in reinsurance.
The court held that the Commissioner did not abuse his discretion in discrediting the rating bureau’s expert and his analysis. The court noted that the Commissioner directly addressed the methodology and made a record with findings that supported the Commissioner’s decision. The court noted that the Commissioner had addressed the so-called real world evidence that the rating bureau presented and had rejected it because the data included quota share reinsurance or non-catastrophe reinsurance in almost all of the years considered. The court held that the Commissioner did not abuse his discretion in disregarding that evidence.
Finally, the court held that the Commissioner’s selection of 10% was not arbitrary based on the evidence presented by the Insurance Department’s witnesses. Court held that the Insurance Department witness was competent to testify given that he was an actuarial consultant with a professional designation as an Associate in Reinsurance. The court upheld the Commissioner’s determination of the reinsurance provision as based on a reasoned analysis with a rational basis in the evidence and was from the middle range developed by the actuary.