CDI Finds they Overcharged Employer…

Applied Underwriters Ignored X-Mod Change

Insurance Commissioner Ricardo Lara finds more controversy about Applied Underwriters. Commissioner Lara determined California Insurance Company (CIC), an Applied Underwriters unit, violated Insurance Code sections 11734 and 11735 by using an unfiled and unapproved loss rating factor to nullify the positive impact of an amended X-Mod that dropped nearly 60 points and should have lowered the employer’s premiums.

The Department also found that Applied used an illegal experience modification formula that resulted in this employer being charged $180,000 more than they should have. These is reason to suspect this is not a one-time offense.

As an Applied Underwriters carrier, CIC is part of the larger Berkshire Hathaway (NYSE: BRK.A) group of companies. Berkshire is in negotiations to sell Applied Underwriters’ and its related companies.

The case stems from 5 Diamond Protection’s time as a CIC insured from June 2016 until the policy was canceled on Jan. 9, 2018 for non-payment. 5 Diamond provided security services to bars, nightclubs, and hotels, but it ceased active operations in late 2017 or early 2018 due to financial troubles.

Here, 5 Diamond had an X-Mod of 163 when the policy renewed on June 8, 2017, but the X-Mod was corrected to a 106 X-Mod after previously excluded payroll was added to the calculation. The payroll from 2015 had not been audited in time for the original X-Mod calculation. The change in the X-Mod was applied retroactively back to the policy inception date. The revision reduced 5 Diamond’s estimated experience-modified premium by more than $103,000.

CDI says Applied used an unfiled Loss Rating Factor to nullify the change.

Unique Formula

“[CIC] uses the Loss Rating Factor to eliminate any difference between an insured’s experience-modified premium and its premium under the Loss Rating Plan model,” according to the decision. “The result is that the Loss Rating Plan rates and the Loss Rating Plan premium remain constant during the policy year, irrespective of whether the insured’s experience modification changes. [CIC] simply adjusts the Loss Rating Factor to counteract the changed experience modification, so that the product of the filed rate, the experience modification, and the Loss Rating Factor always equals the Loss Rating Plan rate.”

The Department says CIC has not filed any description of the Loss Rating Factor or its effects with the Commissioner. “In addition, none of Respondent’s Loss Rating Plan filings indicate that an insured’s premiums will be unaffected by a mid-policy period change to the experience modification,” according to CDI administrative law judge Clarke de Maigret who wrote the decision.

Applied argued that it was not required to file the Loss Rating Factor – a position it also took in prior disputes with the Department over its reinsurance participation agreement (RPA) used in its EquityComp and SolutionOne programs. It lost the argument in all. 

Contravenes Public Policy

In addition to not filing the Loss Rating Factor, CDI says the insurer also failed to file other “supplementary rate information” with its Loss Rating Plan. Without this supplemental rate information, it is not possible to calculate rates or premiums for an insured.

The unfiled information includes a “Medical Only Claim Development Factor,” an “Indemnity Claim Development Factor,” and a “Medical Only Loss Development Factor.” The factors are determined by an actuarial calculation on aggregate historical data that is not publicly available, according to CDI.

Maigret says the use of this unfiled supplemental rate information and the unfiled Loss Rating Factor is not only unlawful but contravenes public policy and misapplies CIC’s filed rates.

“Section 11735’s policy aims include ensuring that the Commissioner has information necessary to determine that insurers charge amounts that are not discriminatory, cover their losses and expenses, and do not threaten their solvency,” Maigret wrote. “By withholding supplementary rate information from its filings, Respondent prevented the Commissioner from exercising those oversight duties.”

Failing to file the information also obfuscates the rates that are actually being charged and limits employers ability to obtain coverage at the best rates. “Rate disclosure confers little value if the public does not have access to the formulas and information carriers use to modify their rates,” Maigret adds. “Meaningful price comparison is simply impossible without such formulas and information.”

Experience Rating Violation

The decision also finds that CIC violated section 11734’s Uniform Experience Rating Plan requirements by using a different experience rating period and essentially ignoring the significant change in 5 Diamond’s X-Mod.

The decision notes that CIC’s loss rating plan uses a five-year experience rating period that ends no more than 90 days before the policy’s effective date. The state’s Experience Rating Plan uses three years of experience that typically ends 21 months before the policy date.

“In addition, the Loss Rating Plan model adjusts premiums using three different methods to assess risks specific to the insured and a further method to assess risks more generally within the insured’s industry,” Maigret notes. “Those methods differ markedly from the ERP’s single experience modification formula, which is the only experience rating formula permitted by the Insurance Code.”

Additionally, Maigret rejected CIC’s argument that the Commissioner had actually approved the Loss Rating Plan. “[T]he Commissioner’s failure to reject a rate filing does not indicate he approved its contents,” he wrote. “In any event, the Commissioner has no authority to approve a plan that violates the Insurance Code.”

Finding that CIC misapplied its filed rates by using the Loss Rating Factor and the Loss Rating Plan, the department ordered the carrier to recalculate 5 Diamond’s premium using CIC’s filed rates for the covered classes and applying the 106 X-Mod to the base premium.

“We are of course, very pleased with the outcome, which illustrates the important function the Insurance Commissioner serves in protecting California businesses such as 5 Diamond from arbitrary and unfair premium adjustments which are incapable of rational prediction and interfere with legitimate business planning,” says attorney Nicholas Andrea. “As for the recalculation of premium remedy ordered, we are not at liberty to disclose given ongoing discussions between 5 Diamond and CIC.”

Copies of the decision in 5 Diamond Protection v. California Insurance Company are available in our Resources section or by clicking here.