From the Readers: Ethics at Issue

Dear Editor:

This is in response to the article, "The Ethical Issues Forum: The Case of The Adequate Rate." I would have to side with the state insurance regulator on this one.

According to the Statement of Principles Regarding P/C Insurance Ratemaking, "A rate provides for all costs...." That rate has an expected profit margin associated with it. There are many types of dividend plans, but if my general understanding of a dividend is correct, a dividend is a return of premium due to profits in excess of the expected profit margin. Any rate that provides for dividend payments is a rate that provides for excessive profits.

From the policyholder's standpoint, it does not make sense to raise premiums for the sole purpose of returning a portion of premium in the form of dividends. The only one who can benefit from this practice is the insurance broker/agent who gets a higher commission based on a higher premium.

Brian Turner

 

Dear Editor:

Here are some thoughts on this Quarter's Ethical Issues Forum, The Case of the "Adequate Rate."

Both parties have valid points. To resolve the issue, one question needs to be addressed:

Does the voluntary implementation of a dividend program result in a net economic gain or loss to Adequate Insurance Company's policyholders?

Net Gain=Premium(without Dividend Expense) - Premium(with Dividend Expense) + PV(E[Dividends])

Where E is the Expected Value Operator and PV is the Present Value Operator, the discount rate used for the Present Value should be the Market Rate of Return, since that is the opportunity cost to the policyholder.

If there is a net gain, the company makes the following statements:

We are voluntarily implementing a new Dividend program.

• We are going to charge the policyholder more money.
• There will be a net economic gain to the policyholders.
• Our long-run competitive position will improve (due to net economic gain to policyholders).
• Our agents will get more commission dollars on every policy.

If there is a net loss (negative net gain):

• We are voluntarily implementing a new Dividend program.
• We are going to charge the policyholder more money.
• There will be a net economic loss to the policyholders.
• Our long-run competitive position will deteriorate (due to net economic loss to policyholders).
• Our agents will get more commission dollars on every policy.

I contend that the statement "Our rates are NOT excessive" is consistent with those statements made under "net gain" and not consistent with those under "net loss." Is there an actuary who would disagree with me? If so, I'd like to hear support for that position.

Dave Schofield