Washington, D.C. — In a letter sent to all state insurance commissioners this week, the Consumer Federation of America urged that steps be taken to fill the gap caused by the sudden and unexpected deletion by the Casualty Actuarial Society (“CAS”) of the key principles that guide how insurance rates for auto insurance, home insurance and other property/casualty insurance coverages are calculated by insurance companies. The absence of these principles opens the door to insurers proposing insurance prices that are no longer tied to the cost of risk, particularly endangering lower-income Americans and people of color.
For decades, insurance rates for personal auto, homeowners, renters, and other insurance coverages have been made by actuaries guided by a simple principle: rates charged to people must reflect the costs related to the risk being insured. Nothing else was to be added that would move the rate away from the cost of the risk. This principle was enshrined in the Statement of Principles (“SOP”) Regarding Property and Casualty Insurance Ratemaking, which was adopted by the CAS in May 1988.
Since 2013 some insurers have sought to amend or remove these principles in order to, among other unfair practices, allow the use of “price optimization” algorithms that raise premiums above the cost of the risk for those who do not shop around. But setting rates in this manner would violate the SOP and state laws for which the SOP has provided context and clarity. Without notice, on December 22, 2020, the CAS announced that its Board of Directors had unilaterally, without any of the usual public comment, rescinded the SOP. This shocked and infuriated many members of CAS and state insurance regulators.
“At the behest of insurance companies, and without engaging regulators or other actuaries, the Casualty Actuarial Society Board unilaterally tossed out the Principles that prevent insurance companies from charging excessive prices or unfairly discriminating against certain customers.” said CFA Insurance Director J. Robert Hunter, who is an actuary, a member of CAS for more than 50 years, and the former Texas Insurance Commissioner. “It is urgent that states act now to adopt the rescinded Principles themselves and instruct insurers to continue to follow them in making insurance rates.”
In response to the CAS decision to rescind, the Casualty Actuarial and Statistical Task Force (CASTF), the actuarial group in the National Association of Insurance Commissioners (NAIC) asked CAS to reverse the rescission stating that the “Statement of Principles regarding Property and Casualty Insurance Ratemaking is too important of a document and too widely cited and relied upon to be rescinded at this time in that there is no document as concise and accessible as the Ratemaking SOP that so clearly and completely ties rates to risk.”
CAS summarily rejected the CASTF request to reverse the rescission.
This leaves no actuarial standards at all that apply to the final rates people pay for insurance coverage, a dangerous situation for regulators and consumers. While the elimination of the actuarial trade association’s Principles, does not change state laws, it is sure to lead some insurers to try to exploit the sudden lack of professional guidance on insurance rates people pay.
To remedy this, CFA has asked state insurance regulators to continue to recognize the validity and relevance of the rescinded Principles for ensuring that insurance rates are not excessive, inadequate, or unfairly discriminatory. To accomplish this goal, CFA submitted a draft Bulletin for each state to adopt instructing insurers to certify that rate filings they submit reflect the now-rescinded Principles. CFA is also petitioning the NAIC to take steps to ensure that, across the nation, states continue to rely upon the rescinded CAS principles in their regulatory processes.
“The impression that the Principles are no longer viewed as valid by the actuarial profession is in error and is especially troubling in an environment in which new algorithms and certain rating characteristics being used by insurers are being challenged for their biases and perceived lack of relationship to risk. Studies have shown that these new factors and algorithms particularly harm low-income people and communities of color,” said Hunter. “Since the rescission opens the door to attacks on each state’s consumer protection and rating laws by insurers seeking to overcharge vulnerable insurance consumers, the states must promptly step in to ensure that insurance companies abide by these fundamental principles of ratemaking that the CAS was too weak to defend.”
Read the letter here.
Contact: J. Robert Hunter, 703-528-0062