In re Filing by Automobile Rate Office
No. 39
IN THE SUPREME COURT OF NORTH CAROLINA
Filed 5 April 1971
278 N.C. 302
IN THE MATTER OF A FILING BY THE NORTH CAROLINA AUTOMOBILE RATE ADMINISTRATIVE OFFICE FOR A REVISION OF LIABILITY RATES ON PRIVATE PASSENGER VEHICLES
The only power the Commissioner of Insurance has to fix rates is such power as the General Assembly has delegated to and vested in him.
2. Administrative Law § 4; Insurance §§ 1, 79.1— determination of automobile insurance rates — applicable rules of evidence
The statute providing that the rules of evidence as applied in the superior and district courts shall be followed in all administrative proceedings before State agencies, held not applicable to a public hearing before the Commissioner of Insurance on proposals for a general revision of insurance rates submitted by a statutory rate-making bureau.
3. Insurance § 1— rate-fixing power of the Commissioner
The power of the Commissioner of Insurance to fix rates effective from a specified future date is a legislative power.
4. Insurance § 79.1— automobile insurance rate hearing — competency of evidence for rate hearing
In fixing a 2.8% rate increase on passenger automobile liability insurance effective 28 January 1970, the Commissioner of Insurance could properly consider testimony and documentary evidence that had been compiled by the Automobile Rate Administrative Office from various sources, including (1) data furnished by the Statistical Agents of the Rate Office reflecting the composite experience of all licensed insurance companies and showing that losses for 1966 and 1967 had exceeded the proportion of the premiums allocated for the payment of losses under the then existing rates, and (2) data obtained from various state, federal and private agencies showing the increase in motor vehicle accidents, hospital charges, physicians’ fees, automobile repair parts, and weekly gross earnings of production workers; the fact that much of this evidence would have been inadmissible in a trial in the superior or district courts does not affect the Commissioner‘s consideration of it in the rate hearing.
5. Insurance § 79.1— automobile insurance rates — showing of “expense loading” component
Data submitted to the Rate Office by automobile liability insurers must reflect the insurers’ underwriting profit and loss experience in North Carolina.
6. Insurance § 79.1— automobile insurance rate increase
An order of the Insurance Commissioner approving a 2.8% rate increase on passenger automobile liability insurance is supported by sufficient evidence and is affirmed by the Supreme Court, although the data submitted by the Rate Office failed to show the insurers’ underwriting profit and loss experience in this State.
Justice LAKE dissenting.
APPEAL by the Attorney General from the judgment entered by Bailey, J., on April 24, 1970, in WAKE Superior Court, certified in accordance with
On July 1, 1969, the North Carolina Automobile Rate Administrative Office (Rate Office) made a filing with the Commissioner of Insurance (Commissioner), pursuant to
After due advertisement, the Commissioner, on September 16, 1969, conducted a public hearing, which was continued to and resumed on September 18, 1969. It was then continued to and resumed on October 6, 7, 9, 14 and 15, and November 12, 1969. It was concluded on November 18, 1969.
Prior to the hearing, to wit, on September 15, 1969, the Attorney General, as authorized by Chapter 535, Session Laws of 1969, intervened in behalf of “the insurance consuming public,” and denied that “a rate increase for private passenger liability insurance is necessary or justified at this time.”
At the hearing, the evidence presented by the Rate Office consisted of numerous exhibits and the testimony of its General Manager, Paul Mize, and of John C. Jeffries and J. Robert Hunter. The Commissioner called as witnesses George Edward King, Chief Fiscal Examiner, and Robert Holcombe, Assistant Fire and Casualty Actuary, both of the staff of the North Carolina Department of Insurance. The Attorney General offered no evidence. Statements presented by individual members of the public are not material to the present appeal.
In his order of December 18, 1969, which comprises eleven pages of the record, the Commissioner, after preliminary re-
The Rate Office excepted to those portions of the Commissioner‘s order which denied the overall increase of 5.3% requested in its filing of July 1, 1969.
The judgment entered by Judge Bailey overruled the exceptions and assignments of error set forth in the petitions for review filed by the Attorney General and the Rate Office, respectively, and affirmed in its entirety the Commissioner‘s order of December 18, 1969.
The Attorney General excepted to the judgment entered by Judge Bailey and gave notice of appeal. The Rate Office did not appeal.
In the Superior Court and in the Supreme Court the North Carolina Fire Insurance Rating Bureau sought and received permission to appear and file a brief and to argue as amicus curiae.
Attorney General Morgan, Deputy Attorney General Benoy and Assistant Attorneys General Rosser and Hudson, appellant intervenor.
Allen, Steed & Pullen, by Arch T. Allen, for North Carolina Automobile Rate Administrative Office.
William T. Joyner for North Carolina Fire Insurance Rating Bureau, amicus curiae.
BOBBITT, Chief Justice.
STATUTORY FRAMEWORK
General Statutes of North Carolina, Chapter 58, known as “the Insurance Law,”
In Subchapter I, the Insurance Department is established “as a separate and distinct department,”
It is provided that the Commissioner “shall appoint” a chief deputy commissioner, a chief actuary and “such other deputies, actuaries, examiners, clerks and other employees as may be found necessary for the proper execution of the work of the Insurance Department, at such compensation as shall be fixed and provided by the Budget Bureau.”
The 1939 Act created and established the Rate Office.
One of the stated objects and functions of the Rate Office is “(t)o maintain rules and regulations and fix rates for automobile bodily injury and property damage insurance and equitably adjust the same as far as practicable in accordance with the hazard of the different classes of risks as established by said bureau.”
The statutory provisions referred to above are codifications of the provisions of the 1939 Act. They authorized the Rate Office to “fix rates for automobile bodily injury and property damage insurance.” However, approval of the Commissioner was required before the rates could be put into effect.
In United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L. Ed. 1440 (1944), the Supreme Court of the United States considered an appeal by the United States from a decision of the United States District Court for the Northern District of Georgia dismissing an indictment which charged the appellees, an association of nearly
Soon after the decision in United States v. South-Eastern Underwriters Association, supra, the Congress of the United States enacted legislation (Act of March 9, 1945, 59 Stat. 33, codified as
Seemingly in response to the decision in United States v. South-Eastern Underwriters Association, supra, and in anticipation of the enactment of federal legislation such as that embodied in the Act of March 9, 1945, known as the McCarran-Ferguson Act, the General Assembly enacted Chapter 381 of the Session Laws of 1945, codified as
In Allstate Insurance Company v. Lanier, a declaratory judgment involving our statutes,
Prior to the enactment of Chapter 943 of the Session Laws of 1965, no statute provided for periodic filings by the Rate Office with the Commissioner of the data referred to in
Except as indicated below, the foregoing constitutes the statutory framework for the consideration by the Commissioner of the Rate Office‘s filing of July 1, 1969.
STATISTICAL DATA
Regulation 21, made and promulgated by the Commissioner, provides, inter alia:
“Bureaus and companies to which the provisions of Article 25, entitled Regulation of Automobile Liability Insurance Rates, (apply) are requested to file all rate manuals, classification plans, rating plans, rating schedules, rating rules and statistical plans proposed to be used in North Carolina, relating to: Automobile Liability Coverages.
“Statistical agents for the various regulated lines are hereby appointed as follows:
- Mutual Insurance Rating Bureau
- Insurance Rating Board
- National Association of Independent Insurers
- National Independent Statistical Service
“These bureaus will annually collect and compile all experience data, prepare the necessary experience exhibits for rate making purposes and make such filings as may be required.”
The Mutual Insurance Rating Bureau (MIRB) and the Insurance Rating Board (IRB) are licensed rate-making bureaus in many States. They are approved Statistical Agents in all States. The National Association of Independent Insurers (NAII) and the National Independent Statistical Service (NISS) are approved Statistical Agents for their member companies but are not licensed rate-making bureaus.
The testimony of Paul Mize, General Manager of the Rate Office, was to the effect that each of the licensed companies (then 251) is required to submit at regular intervals a statistical report, accompanied by a transmittal letter and affidavit from an official of the company, to one of the four designated statistical agents in accordance with a statistical plan or code approved by the Commissioner. According to Mize, these reports set forth in required detail the company‘s exposures, including the number of cars insured and the coverages, the amount of
Every licensed company, irrespective of its size or the extent of its business in North Carolina, has equal representation and vote in the Rate Office. The data furnished the Rate Office by the Statistical Agents does not disclose the experience of any one company. It reflects the aggregate or composite experience of all licensed companies as if this were the experience of a single company. The statistical data submitted to it by the Statistical Agents is used by the Rate Office in preparing its July 1 Filing.
THE JULY 1, 1969 FILING
The private passenger automobile liability insurance rates in effect since April 9, 1969, are those approved by the Commissioner by order of March 20, 1969, as a result of the July 1, 1968 Filing submitted by the Rate Office. This 1968 Filing was based (mainly) on experience during 1965 and 1966.
On May 20, 1969, the Governing Committee of the Rate Office, after reviewing the statistical data compiled and furnished to it by the Statistical Agents adopted a schedule providing for an increase of 1.5% in the rates applicable to bodily injury insurance and an increase of 11.7% in the rates applicable to property damage insurance, or an overall (composite) increase of 5.3%. The July 1, 1969 Filing set forth the proposed increases, the experience and reasons asserted in justification thereof, and sought the approval of the proposed increases by the Commissioner. This 1969 Filing was based (mainly) on experience during 1966 and 1967.
Mize testified that the figures showing the effect of the proposed increases were based on the old manual rates or policy limits of 5/10/5 despite the fact a policy written or renewed after January 1, 1968, was required to have minimum limits of 10/20/5 to serve as proof of financial responsibility (
The rate-making process on which the 1969 Filing was based is substantially the same as that used as a basis for the filing in 1968 and prior years.
The 1969 Filing asserts as justification for the proposed increases that, during the years 1966 and 1967, weighted equally, the companies incurred losses ($151,733,706.00) in excess of premiums provided for losses ($141,146,346.00) in the amount of $10,587,360.00. In explanation, it was asserted: (1) That the increase in motor vehicle accidents was greater than the increase in automobile registrations; and (2) that the increase in accident frequency was compounded by the increases in claim settlements, attributable to increases in medical and hospital costs, wage losses, automobile labor repair charges, and the prices of automobile parts necessary to make repairs.
If the Commissioner determines, after a hearing, that the rates proposed by the Rate Office “are excessive, inadequate, unreasonable, unfairly discriminatory, or otherwise not in the public interest,” it becomes his duty to issue an order to the Rate Office directing that the proposed rates “be altered or revised in the manner and to the extent stated in such order to produce rates, classifications or classification assignments which are reasonable, adequate, not unfairly discriminatory, and in the public interest.” (Our italics.)
In his order of December 18, 1969, the Commissioner altered or revised the proposals of the Rate Office in two particulars, viz.: First, he adopted a different method for calculating the “factor to adjust losses” in determining the expense to be allocated for the payment of pending claims; and second, he found that the Rate Office “did not take into direct consideration the effect of investment income from unearned premium reserves.” See
THE EVIDENCE
The Rate Office relied on the data furnished to it by the Statistical Agents to support its assertion that the losses during 1966 and 1967 had exceeded the proportion of the premiums
THE RATE-MAKING PROCEDURE
Since the Act of 1965,
“For rate-making purposes, the components of a casualty insurance premium are the ‘pure premium’ and ‘expense loading.’ The ‘pure premium’ is the amount allocated for the settlement of casualty losses, including loss adjustment expenses. ‘Expense loading’ is the amount allocated for operating expenses and for underwriting profit and contingencies.” Virginia State AFL-CIO v. Commonwealth, 209 Va. 776, 167 S.E. 2d 322 (1969).
The increases proposed by the Rate Office in its 1969 Filing are based on an allocation of 68.6% of the premium dollar to “Losses and Loss Adjustment Expenses” and the remaining 31.4% to “Expense Loading.” The 31.4% is composed of the following items: Production cost, 16.8%, which is a composite of 10% for assigned risks and 20% for voluntary risks; gen-
A contingency contemplated in the allowance of 5% for “underwriting profit and contingencies” is federal income tax, approximately 50% of a company‘s net profit, if any.
The 68.6% allocated to “Losses and Loss Adjustment Expenses” is based on 1966 and 1967 experience as reported by the Statistical Agents upon their analysis of the reports submitted to them by all licensed companies. It is noteworthy that this proportion was greater than that on which prior filings have been based, thus leaving a smaller total percentage for allocation to “Expense Loading.”
It does not appear that the licensed companies, in their reports to the Statistical Agents or otherwise, supplied data as to their actual experience in North Carolina in 1966 and 1967 with reference to the items constituting “Expense Loading.” The Rate Office offered evidence that each of these allocations was reasonable and in line with allowances recognized as reasonable throughout the country. This evidence consisted of the opinion evidence of Mize, Holcombe and Hunter, and of statistics as to similar allowances approved elsewhere in the country.
The record contains no statistical or other evidence as to the profits and losses in North Carolina in 1966 and 1967 of any or all of the companies licensed to write automobile liability insurance in this State.
The evidence includes the tabulation by the Insurance Rating Board as of September 3, 1969, of the automobile liability insurance rates in effect in the twenty-five eastern States according to the latest information then obtainable. In this tabulation, North Carolina is twenty-third, the only lower rates being those of Delaware and of Georgia. Too, this tabulation indicates that the North Carolina rates are approximately 30% lower than the average of the rates in the twenty-five eastern States. The evidence does not disclose when, from whom or the circumstances under which the Insurance Rating Board obtained the information from which its tabulation was prepared.
ABSENCE OF LEGISLATIVE STANDARDS
If the Commissioner, after a hearing, determines that “the rates charged or filed . . . are excessive, inadequate, unreason-
[1] We pass, without discussion, questions relating to the power of the General Assembly to fix the rates for automobile liability insurance. It is noteworthy that a casualty insurance company, unlike a public utility, has no monopolistic or exclusive rights. All of the 251 competing companies are required to issue policies at the rate fixed by a State agency as a condition of doing business in North Carolina. Suffice to say, the only power the Commissioner has to fix rates is such power as the General Assembly has delegated to and vested in him.
“It is settled and fundamental in our law that the Legislature may not abdicate its power to make laws nor delegate its supreme legislative power to any other coordinate branch or to any agency which it may create. Coastal Highway v. Turnpike Authority, 237 N.C. 52, 74 S.E. 2d 310. It is equally well settled that, as to some specific subject matter, it may delegate a limited portion of its legislative power to an administrative agency if it prescribes the standards under which the agency is to exercise the delegated powers.” Turnpike Authority v. Pine Island, 265 N.C. 109, 114, 143 S.E. 2d 319, 323 (1965), and cases there cited.
For present purposes, it is sufficient to say that no question is presented in the Attorney General‘s petition for review of the Commissioner‘s order of December 18, 1969, as to the power of the General Assembly or of the Commissioner to fix rates. The arguments brought forward assume the existence of such power.
In the absence of a legislative formula or standards, the Commissioner has had no alternative but to look to the rate-making procedures recognized in the industry and in other States. The words, “pure cost” and “expense loading” as used, without explanation, in
SCOPE OF REVIEW
[2] The case is before us upon the ten assignments of error set forth in the Attorney General‘s petition for review by the Superior Court of the Commissioner‘s order of December 18, 1969. These assignments challenge all findings of fact in the Commissioner‘s order on the ground they were based wholly or principally on incompetent testimony and unauthenticated and otherwise incompetent documentary evidence. At the hearing(s), the Attorney General objected to practically all of the evidence offered by the Rate Office and excepted to the overruling of his objections. He contended the provisions of Chapter 930 of the Session Laws of 1967, codified as
The Attorney General‘s petition for review of the Commissioner‘s order of December 18, 1969, brought the matter to the Superior Court for hearing on the assignments of error set forth in that petition. We are concerned only with that portion of Judge Bailey‘s judgment which overrules these assignments of error and affirms the Commissioner‘s order.
THE 1967 ACT
The 1967 Act, as codified, is quoted below:
“§ 143-317. Definitions.—As used in this article,
(1) ‘Administrative agency’ means any State authority board, bureau, commission, committee, department, or officer authorized by law to make administrative decisions, except those agencies in the legislative and judicial departments of government, the North Carolina Utilities Commission, the North Carolina Industrial Commission, the Employment Security Commission of North Carolina, and the institutions and agencies that operate pursuant to chapters 115, 115A, and 116 of the General Statutes.
(2) ‘Party’ means each person or agency named or admitted as a party, or properly seeking and entitled as of right to be admitted as a party.
(3) ‘Proceeding’ shall mean any proceeding, by whatever name called, before an administrative agency of the State, wherein the legal rights, duties, or privileges of specific parties are required by law or by constitutional right to be determined after an opportunity for agency hearing. (Our italics.)
“§ 143-318. Rules of evidence official notice. — In all proceedings:
(1) Incompetent, irrelevant, immaterial, unduly repetitious, and hearsay evidence shall be excluded. The rules of evidence as applied in the superior and district court divisions of the General Court of Justice shall be followed. (Our italics.)
(2) Documentary evidence may be received in the form of copies or excerpts, if the original is not readily available. Upon request, parties shall be given an opportunity to compare the copy with the original.
(3) Notice may be taken of judicially cognizable facts. In addition, notice may be taken of generally recognized technical or scientific facts within the agency‘s specialized knowledge. Parties shall be notified either before or during the hearing, or by reference in preliminary reports or otherwise, of the material noticed, including any staff
memoranda or data, and they shall be afforded an opportunity to contest the material so noticed. The agency‘s experience, technical competence, and specialized knowledge may be utilized in the evaluation of the evidence.”
These facts are noted: In In re Filing by Fire Ins. Rating Bureau, 275 N.C. 15, 165 S.E. 2d 207 (1969), no question was raised as to the applicability of the 1967 Act to the evidence then offered by the North Carolina Fire Insurance Rating Bureau in support of its proposal for increased rates on fire insurance policies. Nor does it appear that any question was raised as to the applicability of the 1967 Act to the evidence offered by the Rate Office in support of its proposals filed July 1, 1967, and July 1, 1968, on private passenger automobile liability insurance policies. In these proceedings, the Attorney General appeared as counsel for the Commissioner. In the present proceeding, the Attorney General, as authorized by Chapter 535 of the Session Laws of 1969, intervened and appeared “in a representative capacity for and on behalf of the using and consuming public of this State.” Understandably, when so intervening and appearing, the Attorney General deemed it his duty to assert the applicability of the 1967 Act to rate-making proceedings before the Commissioner and obtain an authoritative ruling thereon.
Pursuant to
“6. Public hearings shall be conducted in an orderly but informal manner. The hearing officer shall admit all evidence of any type having reasonable probative value, and shall include in the evidence any relevant or material evidence which may be made available to him by any records of the Insurance Department or disclosed by any investigation or study of the problem by personnel of the Department. Irrelevant, immaterial or unduly repetitious evidence shall be excluded. Any evidence of the type upon which responsible persons are accustomed to rely in the conduct of insurance affairs shall be deemed to have reasonable probative value. A hearing may be continued when such continuation is, in the Commissioner‘s judgment, warranted.” (Our italics.)
It is noted that both
We are of opinion, and so hold, that the 1967 Act, now codified as
[3]
There were no specific parties to the public hearing before the Commissioner. In submitting the 1969 Filing, the Rate Office, a statutory bureau, was engaged in the performance of the duty imposed upon it by
SUFFICIENCY OF THE EVIDENCE
[4] We agree with the Attorney General that much of the testimony and documentary evidence produced at the hearing(s) did not meet the tests required for the admissibility of evidence over objection thereto in a trial in a Superior or District Court. However, we think the evidence produced was “of the type upon which responsible persons are accustomed to rely in the conduct of insurance affairs” and was for consideration by the Commissioner in connection with his approval or fixing of rates to be effective from some future date. Too, in making what must be considered in large measure a policy or judgment decision, the Commissioner had the benefit of his own continuous study and knowledge of changing conditions, including the enactment of Chapter 215, Session Laws of 1969, which rewrote
The opinion testimony of Mize, Hunter and Holcombe supports the Commissioner‘s decision and order of December 18, 1969. Each of these men has had extensive experience and is well informed with reference to liability insurance rates on private passenger automobiles in North Carolina and throughout the country, including the percentages allocated to “pure cost” and to each of the various items included in “expense loading.”
Mize has been connected with the Rate Office since 1950 and has been General Manager thereof since February, 1968. He has testified “a good many times in prior automobile liability insurance rate cases before the Commissioner of Insurance.” His work has kept him in close touch with automobile statistical data, compilations and automobile liability insurance rates.
Hunter‘s experience includes employment by the Insurance Rating Board and by the Mutual Insurance Rating Bureau. These bureaus are licensed as Statistical Agents in all States and as Rating Organizations in most States, though not in North Carolina, for automobile liability insurance. In his present position as Assistant Actuary of MIRB, Hunter supervises the preparation of rate revisions in all States where MIRB is licensed as a Rating Organization.
Holcombe, for the past thirteen years, has been employed by the North Carolina Department of Insurance as Assistant Fire and Casualty Actuary. His work involves a critical review of filed material. This includes an analysis of the accounting and statistical methods, practices and procedures used by insurance companies as they relate to automobile liability insurance rates in North Carolina. It was stipulated that he was an expert “in rate analysis.”
DATA REQUIRED BY G.S. 58-248
[5] The record contains no exhibit or testimony that shows precisely what data each company is required to submit to the Statistical Agent to which it reports. The data required and supplied seems sufficient as to the “pure cost” component of the rate. It falls short of that required to reflect the experience in North Carolina as to the “expense loading” component of the rate. Mr. Mize testified: “Countrywide experience is the only experience available. Related to automobile liability insurance specifically, no expense statistics, data, or experience is available for operations solely in the State of North Carolina.” As stated above, the data required and supplied does not reflect a reporting company‘s underwriting profit and loss experience in North Carolina. We are mindful that items such as production costs, administration costs, etc., may consist in part of expenditures elsewhere than in North Carolina, e.g., home office expenses. Even so,
CONCLUSION
[6] As indicated, the data supplied by the companies to the Statistical Agents falls short of that required by
We are of opinion that Judge Bailey‘s judgment, which affirms the Commissioner‘s order of December 18, 1969, should be, and it is hereby, affirmed.
Affirmed.
Justice LAKE dissenting.
With reference to the findings of fact which the Commissioner of Insurance must make in a proceeding to fix the premium rates, there is no difference between fire insurance and automobile liability insurance. In reviewing an order by the Commissioner, fixing premiums for fire insurance policies, this Court said:
“The ultimate question to be determined by the Commissioner is whether an increase in premium rates is necessary in order to yield a ‘fair and reasonable profit’ in the immediate future (i.e., treating the Bureau as if it were an operating company whose experience in the past is a composite of the experiences of all the operating companies), and, if so, how much increase is required for that purpose. This cannot be determined without specific findings of fact, upon substantial evidence, as to (1) the reasonably anticipated loss experience during the life of the policies to be issued in the near future, (2) the reasonably anticipated operating expenses in the same period, and (3) the per cent of Earned Premiums which will constitute a ‘fair and reasonable profit’ in that period.” In re Filing by Fire Insurance Rating Bureau, 275 N.C. 15, 39, 165 S.E. 2d 207.
In the present case, the Commissioner has not made any finding as to items (2) and (3). Without such preliminary findings of fact, his declaration “that the present rates for private passenger automobile liability insurance are inadequate” and his declaration “that the record shows and the statistics support the need for some rate relief for private passenger automobile liability insurance in North Carolina” are not findings of fact, but are mere administrative declarations which no court can review intelligibly. To affirm an order fixing premium rates upon a mere administrative declaration that the old rates are “inadequate” and the new ones are “reason
Before this ultimate finding can be made and reviewed there must be findings by someone as to the earned premiums to be anticipated by the company (i.e., all companies operating in North Carolina considered as one), the anticipated payments to be made on account of claims, the anticipated operating expenses and what is a reasonable and fair profit. Clearly, the statute does not contemplate that the reviewing court will make its own findings of fact as to these matters. The judicial review contemplated by the statute cannot be had unless the Commissioner‘s findings on these preliminary matters are set forth in his order. In the present case, such findings are not set forth in the order of the Commissioner.
In the present case, it is the rate payers, represented by the Attorney General, who appealed. In re Filing by Fire Insurance Rating Bureau, supra, was an appeal by the companies, represented by the Rating Bureau. To affirm an order of the Commissioner fixing premium rates when, as here, the Court does not have before it these essential preliminary findings of fact by the Commissioner is to expose both the rate payers and the companies to the danger of arbitrary rate making by the Commissioner. How can this Court review the Commissioner‘s findings that the former rates are inadequate and the rates now fixed by him are reasonable when we do not know what profit either schedule of rates will produce and do not know what profit the Commissioner deems reasonable? This Court should remand this matter to the Commissioner with instructions comparable to those given in the case of the Fire Insurance Rating Bureau, supra.
Furthermore, there is not in the present record evidence sufficient to support findings of fact upon these essential preliminary questions. No exhibit and no testimony in the record before us shows: (1) The total amount of earned premiums anticipated in a 12 month period, either from the present rates or from the proposed rates, when applied to the number of vehicles registered at the time of filing; (2) the total amount of company expenses, other than payment of losses and expenses related to the payment of losses, attributable to North Carolina
An exhibit filed by the Rate Office shows in precise figures the bodily injury and property damage losses actually incurred by the companies in North Carolina in the two test years, within the minimum coverage limits, that is, payments on claims and expenses incurred in settling them. By pro forma adjustments, apparently proper, the Rate Office computed that such losses and loss adjustment expenses amounted to 68.6 cents of each earned premium dollar under the then present rates. This is a figure which purports to show the actual expenditures by the companies, attributable to their North Carolina business for the payment of losses and expenses relating thereto. Nothing in the record casts doubt upon its substantial accuracy.
Obviously, an insurance company has other expenses. The Rate Office breaks these down into four types: Production Costs; General Administration; Taxes, Licenses, Fees; and Inspection and Bureau. However, instead of showing the amounts actually expended during the test period, in or attributable to North Carolina, for these items, as it did in the matter of losses and expenses related thereto, the evidence of the Rate Office merely allocates to each of these items a specified percentage of the premium dollar, these allocations being: Production Costs 16.8%; General Administration 5.5%; Taxes, Licenses, Fees 3.1%; and Inspection and Bureau 1.0%, making a total for the four items of 26.4 cents out of each earned premium dollar. Adding this to the 68.6 cents of the premium dollar, computed from actual experience as the amount paid for losses and expenses relating thereto, the total was 95 cents out of the earned premium dollar. This, says the Rate Office, leaves 5 cents of each earned premium dollar for “underwriting profit and contingency.” Of this, income taxes will consume 2.6 cents, leaving 2.4 cents for addition to surplus or declaration of dividends.
When expressed in terms of 2.4 cents per premium dollar, the net profit after taxes, and, of course, after the payment of all losses and expenses, seems trivial. The actual fact is quite to the contrary. In 1967 the earned premiums just from the then minimum coverages of $5,000 for bodily injury to one person, $10,000 for all injuries in a single accident, and $5,000 for property damage totaled $113,424,348. Since that time, the mini
The Rate Office in the present case has offered no evidence to show the actual expenses of the companies for production costs, or for general administration expense, attributable to North Carolina business. If each of these items has been overstated by as little as one cent per premium dollar, the amount actually remaining for underwriting profit would, necessarily, be increased by two cents of each earned premium dollar, which would amount to a very large sum, indeed, upon the total business done in this State.
It is essential to proper rate making that the expenses of the company, as well as its payments upon claims, be computed accurately on the basis of North Carolina experience, not just approximated on the basis of a hypothetical or theoretical allocation of the earned premium dollar as was done by the Rate Office and accepted by the Commissioner in this case.
The testimony of the witnesses for the Rate Office shows that they arrived at their computation of the allocation of the earned premium dollar to these expenses not from North Carolina experience, but from “countrywide expense experience” of all members of the Insurance Rating Board, one of the statistical agents. This “countrywide experience” not only relates to experience of insurers outside this State but includes the experience of companies not doing any business in North Carolina at all and excludes the experience of those who do operate here but report to a different statistical agent.
Furthermore, to predicate a rate increase on the premise that the expense of the insurance companies for General Administration varies in direct proportion to the premium receipts, as
The statistical exhibits filed by the Rate Office in this case showing the actual payments on claims and claim adjustment expense, based upon actual North Carolina experience, demonstrates that these companies can compile accurate data with reference to their expense experience attributable to their business in this State alone. It is not unreasonable to require these companies to assume the task of allocating to the respective states they serve the appropriate shares of their general expenses. The statutory plan for insurance rate making adopted by this State contemplates that the Commissioner of Insurance will require such proof before authorizing an increase in the premium rates for liability insurance policies issued to the residents of this State.
There are substantial differences between North Carolina and other states in regard to automobile liability insurance. This is a compulsory insurance state. Few of the other states are. The companies have in North Carolina a captive market. Not only does this greatly increase the volume of business, which usually affects the profit necessary per unit of sale, but it also tends to reduce the sales promotion cost per policy. On the basis of “countrywide experience” the Rate Office allocated, and the Commissioner accepted, 16.8 cents of each premium dollar in North Carolina to Production Expense. If this allocation is only one cent too high, as applied to North Carolina, the result is a concealment in “Expense” of more than $1,000,000 in profit.
It is quite true that in North Carolina the companies must issue assigned risk policies. This, no doubt, tends to increase the hazard, per policy, but on the Rate Office‘s own evidence,
Assuming that the actual profit derived by the companies from their North Carolina business has been determined accurately, the question remains, is this a fair and reasonable profit? This can be determined only in the light of the ratio of profits to gross sales in other businesses of comparable risk. A reviewing court is not the proper body to determine that question. That determination should be made by the Commissioner. He has not done so in this case.
There is in the record no substantial evidence to support a finding by the Commissioner upon this question. Assuming that an expert insurance actuary is also an expert in the matter of determining a fair rate of profit, which in my opinion does not follow necessarily, a finding by the Commissioner that a certain rate of profit is reasonable requires for its support more than the mere assertion by an expert witness that it is so. In McCormick on Evidence, § 12, it is said:
“Undoubtedly there is a kind of statment by the witness which amounts to little more than an expression of his belief as to how the case should be decided or as to the amount of damages which should be given or as to the credibility of certain testimony. Such extreme expressions as these all courts, it is believed, would exclude. There is no necessity for such evidence, and to receive it would tend to suggest that the judge and jury may shift responsibility for a decision to the witnesses.”
This statement is equally applicable to an administrative officer, such as the Commissioner of Insurance, when conducting an inquiry into the reasonableness of a rate of profit.
North Carolina, being a compulsory insurance state, is relatively unique among the states of the Union. Consequently, the mere statement that a certain rate of profit is allowed, or accepted, in other states is not substantial evidence that it is a fair and reasonable rate of profit in this State. This is especially so in the total absence of any evidence as to which other states
The majority opinion appears to proceed from the position, indicated in its statement of the facts, that the Attorney General raised no point other than the competency of evidence admitted over his objection.
The fourth assignment of error in the petition for review filed by the Attorney General in the Superior Court reads as follows:
“(4) That the Commissioner erred in overruling the Attorney General‘s motion to dismiss made at the end of the Rating Bureau‘s evidence and again at the end of all the evidence on the ground that there was not sufficient competent evidence to support any part of the suggested rate increase.”
Since the first three assignments of error in the petition for review were directed specifically at the alleged errors of the Commissioner in overruling the Attorney General‘s objections to testimony and exhibits offered by the Rate Office, it seems clear that Assignment of Error No. 4 was directed to the sufficiency of the evidence to sustain the burden of proof placed upon the Rate Office in such proceedings as this.
Assignment of Error (10) reads:
“(10) That the Commissioner erred in ordering * * * that private passenger automobile liability insurance rates be increased by 2.8% in that such order is based upon erroneous findings of fact and erroneous conclusions of law which resulted from incompetent testimony to which the Attorney General consistently made timely objections and motions to strike.”
While these assignments of error are not stated with the utmost precision, they are, in my opinion, sufficient to present for the consideration of a reviewing court the sufficiency of the Commissioner‘s findings of fact and the sufficiency of the evidence to support them.
The learned judge who heard the matter in the Superior Court evidently regarded this question as having been raised for Conclusion No. 9 in his judgment reads: “There is substantial evidence in the record * * * to support the findings and con
Consequently, it is my view that the sufficiency of the evidence to support the Commissioner‘s findings of fact as to the adequacy or inadequacy of the former rates and the sufficiency of those findings of fact to support the order allowing the increase in the rates are questions properly before us on this appeal. For the reasons above mentioned, it is my view that the order of the Commissioner should be reversed and this matter remanded to him for the making of findings required by In re Filing by Fire Insurance Rating Bureau, supra.
The statutes of this State impose upon the Commissioner the authority and the responsibility to make the determination of what is the profit actually made in North Carolina. He is not authorized by the statutes to accept determinations “elsewhere in the country” as to what is a reasonable “allocation” to profit, simply because such determinations have been made there. As the majority opinion states, there is nothing whatsoever in this record to show what profits were actually made by the insurance companies operating in North Carolina from their North Carolina business in the test years used in this proceeding. Without such evidence the finding of the Commissioner that a higher premium rate must be paid by the people of this State is unauthorized and should not be affirmed. It is, of course, entirely possible, so far as this record shows, that the Commissioner should have allowed an even larger increase. The difficulty is that the record does not show what, if any, increase is necessary to make the former rates “adequate.”
The majority opinion notes the fact that North Carolina premium rates are lower than the average in the 25 Eastern
The majority opinion says that the Legislature has not defined a “reasonable rate” or provided a formula to guide the Commissioner in determining the same. That being true, we must find the guidance in the terms “adequate” and “reasonable,” which the Legislature has used, or conclude that the statute is designed to give the Commissioner arbitrary, dictatorial power to fix rates, in which event the statute itself would be unconstitutional. It is my view that the words “adequate” and “reasonable” are, themselves, sufficient as standards and, by analogy to the statutes providing for regulation of public utility rates, mean that the premium rates are to be fixed so as to provide sufficient funds to pay losses, all operating expenses, including taxes, and leave a margin of profit sufficient to attract investors to the insurance business in comparison with other businesses of like risk. See, Bluefield Waterworks & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S. Ct. 675, 67 L. Ed. 1176 (1923). Without adequate findings of fact by the Commissioner no reviewing court can determine whether his order meets this requirement.
The majority opinion says, “It is noteworthy that a casualty insurance company, unlike a public utility, has no monopolistic or exclusive rights.” In this State the companies are forbidden by law to vary from the premium rates fixed by the Commissioner. The Commissioner, in the present order, stated correctly that he fixes premium rates as if all the companies operating in this State were a single company, having the composite experience of all of them with reference to losses and operating expenses. Furthermore, the automobile owner and driver in North Carolina is required to purchase liability insurance, subject to an exception which for practical purposes may be disregarded. Technically, it may be correct to say that the automobile liability insurance business in North Carolina is not monopolistic but, so far as rate making is concerned, it is a complete monopoly whose services the public is not even at liberty to reject. The only thing that saves it from condemnation as a monopoly under the rule of United States v. South-Eastern Un-derwriters Association, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440 (1944), is that the State has provided a statutory procedure for regulating its rates in the public interest. Its rates should, therefore, be regulated at least as carefully as those of a public utility for whose services the public can often find an adequate substitute.
Of course, an insurance company has nothing comparable to the rate base of a public utility. The test of a fair return or profit to the insurance company is not to be measured by a percentage of the value of its properties in this State, but a fair return, measured by a percentage of gross sales in this State, can still be determined by the test of what is necessary to attract investors to this business. It is not sufficient for the Commissioner simply to take “allocations” made “elsewhere in the country.”
The majority opinion holds that
It is not necessary for this Court in this proceeding to hold
The Commissioner of Insurance is a State officer authorized by law to make administrative decisions. He is a member of the executive, not of the legislative or judicial department of the State government.
The plain language of the statutes seems clearly to encompass a hearing before the Commissioner for the fixing of insurance rates. The fact that the ratepayers are not designated by name and the fact that the petitioner in the proceeding represents 251 insurance companies, rather than one alone, are not material. If this were a proceeding by a single insurance company to determine its legal right to charge a higher premium
If the Commissioner can order a rate increase on the basis of evidence not admissible in the Superior Court, in a proceeding in which the judge sits without a jury, he can also order a decrease in the rates on the basis of such evidence. Thus, the insurance companies, as well as the public, are exposed by this decision to future findings made without support of evidence competent for consideration by the courts of this State. It is a high price to pay for a rate increase.