Cad P. THURMAN, Commissioner of Insurance of the Commonwealth of Kentucky, and Department of Insurance of the Commonwealth of Kentucky, Appellant, v. MERIDIAN MUTUAL INSURANCE COMPANY, Appellee.
Court of Appeals of Kentucky.
March 17, 1961.
635
Joseph J. Leary, Frankfort, for appellee.
PALMORE, Judge.
In July 1957 the appellee, Meridian Mutual Insurance Company, pursuant to
Since a deviation permitted under
The scope of judicial review in this case is governed by
The statutes principally under consideration are
Again it is stated in
There are three avenues by which an insurer may secure authority for its rates, (a) by independent filing under
Meridian Mutual Insurance Company came into being on January 1, 1953, as the consolidated successor of three Indiana insurance companies, Farmers Mutual Liability Company, Conservative Mutual Insurance Company, and Farmers National Mutual Insurance Company. Theretofore Farmers Mutual had written principally general casualty insurance, and no fire and allied coverage, whereas the business of the other two companies was confined exclusively to fire and allied lines. Statistics introduced in this proceeding related entirely to Meridian and its principal predecessor, Farmers Mutual, and therefore did not show any fire and allied experience prior to 1953. The company now operates in Indiana, Michigan, Kentucky and South Carolina. Its first year of business in Kentucky was 1955.
The company is a subscriber to the Kentucky Inspection Bureau for fire and allied lines and a member of the Transportation Insurance Rating Bureau for homeowners’ policies, personal property floater coverage, and other classes of inland marine insurance. In this proceeding it applied, with certain exceptions, for downward deviations of 15% from the fire and allied rates and 10% from the homeowners’ and personal property floater “loading” rates theretofore established by the respective rating bureaus. In each of the years 1955 to 1957 it had been granted similar deviations except that the deviation on fire and allied lines was 10%. Though a mutual company, its policy is not to pay dividends, but to “operate on the deviation plan,” meaning, of course, lower rates than other companies. The 10% deviation permitted in Kentucky since 1955 had been in force in Indiana for several years, and in 1957 the further deviation to 15% on fire and allied lines was allowed in Indiana and Michigan. By denial of the application in question the Commissioner refused to continue or extend the company‘s authority to use deviated rates in Kentucky. The action of the Franklin Circuit Court on appeal directed allowance of 10% deviations, being the same as the Commissioner had permitted theretofore.
In supporting its application the company presented a number of statistical exhibits showing its steady growth and sound financial condition. As of the end of 1956, out of assets totalling $9,964,970 it had a surplus (excluding voluntary reserves) of $3,875,527. Total premiums written in recent years have increased from $5,750,840 in 1953 to $7,429,847 in 1956 and $4,642,342 for the first half of 1957, resulting in a reduction of underwriting expense per policy. On the other hand, these exhibits indicate a downward trend in net underwriting gain (that is, the profit from sale of insurance as distinct from investment and other income) and ratio of underwriting gain to earned premiums as follows:
| Year | Gain | Ratio |
|---|---|---|
| 1953 | $456,572 | |
| 1954 | $876,790 | 15.4% |
| 1955 | $143,931 | 2.4% |
| 1956 | $100,479 | 1.5% |
And an exhibit filed by the Department of Insurance (with the company‘s consent) subsequent to the hearing, but not mentioned in the Commissioner‘s written opinion, shows that for the year 1957, with earned premiums of $8,162,293, the company experienced a net underwriting loss of $372,196. offset by investment income of $180,042, resulting in a $189,757 decrease in surplus. Other exhibits presented by the company show that for the 4-year period of 1953 through 1956 the company achieved an underwriting gain of 7.53%, which would have been 16.55% had the premiums been based on the bureau rates.
The figures we have mentioned here represent the company‘s total business. It is conceded that its experience in Kentucky
In his written opinion the Commissioner analyzed the company‘s proof against each of the considerations set forth in
(1) Its fire and allied lines experience countrywide and in this state was insufficient in volume and duration to constitute supporting data as envisioned by the statute.
(2) There was no evidence as to the conflagration and catastrophe hazards.
(3) The materially downward trend recently experienced in underwriting gain, at a lesser deviation than the one now sought, indicated the absence of a reasonable margin for underwriting profits and contingencies.
(4) Past and prospective expenses, countrywide and in this state, did not support the proposed deviation. because (a) 94% of the company‘s total premiums (and, therefore, its supporting statistics) were derived from business in Indiana where, inter alia, it was not subject to the 2 3/4% tax applicable to it in Kentucky as a foreign insurer. (b) 86% of the company‘s business consisted of automobile insurance as distinguished from the types of coverage under consideration, with the result that its overall statistics did not accurately reflect its experience in the latter, and (c) in his annual report to the directors in May 1957 the president of the company stated that business had not yet reached the break-even point in Kentucky, costs were up about 18 1/2% over the same quarter of the previous year, and “the present rate level may not be adequate for the year.”
He then considered whether, in spite of the foregoing inadequacies, the company‘s countrywide underwriting results during the past 5 years entitled it to the deviations sought, and concluded that they did not. He took the position that since the company had availed itself of the services of the rating bureaus it was incumbent on it to show wherein the statistical factors on which its proposed rates were based differed from the comparable factors used by those rating bureaus (presumably to prove the bureau rates unreasonable as to the company).
The company contends that the bureau rates, including the factors on which they are based, are already established as fundamentally reasonable and that in order to support deviations therefrom the degree of statistical exactitude required for independent filings is not necessary, particularly where there is a strong showing of the company‘s solvency and financial stability, the experience and skill of its management, the prudence of its policies, its long record of growth and prosperity, the soundness of its basic approaches to the matter of rates, and its ability to operate at the lower rates. These arguments reach the heart of the problem, and although for the reasons hereinafter stated we must uphold the Commissioner‘s action, we find ourselves in agreement with the basic tenet of the company‘s position, which is that an insurer‘s solvency is a dominating consideration in the regulation of its rates, and that a rate structure is “adequate” if the insurer is “financially able to furnish sound insurance and to meet its obligations.” Cf. Richards on Insurance, Vol. I, pp. 147, 220 (footnote).
The purpose of the statutes authorizing independent filings and deviations from bureau classifications is to preserve some measure of rate competition. Overemphasis on uniformity of rates through a restrictive policy toward deviations tends, of course, to stifle competition. Granting the desirability of public regulation in the field of insurance, there is very little real danger that free competition will be “ruinous”
Here we have a foreign insurer whose bread and butter business is automobile insurance. It seeks to extend and expand its volume in certain other lines of coverage. The method it chooses for this purpose is price competition and conservative selection of policyholders. Perhaps for a time this phase of its operations may not be profitable and must be carried by the earnings and surplus realized from the staple automobile insurance business. But is this not a normal and traditional process of the free enterprise system? We think so. The company seeks in this case only to charge the same rates it has in effect in Indiana, where its principal business is done. It is not a case of cutting prices in a selected area to secure business by unfair competition. Other companies are free to respond similarly, subject only to the same safeguarding supervision of the Commissioner. We conclude, therefore, that in requiring of the company substantially the same sort of proof essential to support an independent filing or, in the alternative, a comparative analysis of its own rating factors and statistics against those of the rating bureaus, the Commissioner imposed a criterion not in keeping with the preservation of reasonable competition as contemplated by the statutes in question.
Returning now to the permissible scope of judicial review, bear in mind that the exercise of discretionary power by the Commissioner, though resting ultimately on opinion as distinguished from pure fact, represents a factual finding and is not to be disturbed unless it is arbitrary or unreasonable. By “arbitrary” we mean clearly erroneous, and by “clearly erroneous” we mean unsupported by substantial evidence. By “unreasonable” is meant that under the evidence presented there is no room for difference of opinion among reasonable minds.
Within the foregoing definitions we cannot say that the Commissioner‘s action in denying the application was arbitrary and unreasonable. He noted that under its existing rates, including 10% deviations on the minor segment of its business represented by the lines in question, the company‘s underwriting gain had fallen to 1.5%, and his apprehension in this respect was confirmed by the net underwriting loss of $372,196 experienced in 1957. True, the president of the company sought to mitigate the force of this circumstance by testifying that rapid increases in premium volume temporarily reflect an exaggerated expense ratio (e. g., premiums are treated as “earned” over the term of the policy, whereas the expenses of underwriting, such as agents’ commissions, are charged off immediately), yet we consider this matter within the area of reasonable difference of opinion. We are not insurance experts, and we cannot properly substitute our judgment for that of the Commissioner. He had room to conclude that the company‘s rates did not provide a reasonable margin for underwriting gains and contingencies, which in turn might eventually impair its financial security. Regardless of what its accumulated surplus may have been, he was not obliged to approve the further use of deviated rates if he had any reasonable grounds under the evidence to suspect that a net loss in the company‘s operations was imminent. In such circumstances he was, in effect, not satisfied that under the company‘s existing rate structure it would continue to be “financially able to furnish sound insurance and to meet its obligations,” and the evidence does not convince us that his judgment was manifestly unreasonable.
To its brief the company has appended an exhibit showing very favorable results for the period between May 31, 1958, and May 31, 1959. This information was not before the Commissioner, and any consideration of it here would arrogate to this court a
The judgment of the Franklin Circuit Court is reversed with directions that the order of the Commissioner be sustained.
MONTGOMERY, J., dissents on the ground that the proposed deviations pose no real or immediate threat to the company‘s solvency.