Chapter 9
One approach to the regulation of insurance rates, and in particular the profit provision. which is by no means new but which is consistent with the developing legal principles in this area and also simple enough to be practica1 and fair in the rate regulatory context is the “Confined Operating Return” approach. It is an approach which encompasses both total return and operating return analyses. The Confirmed Operating Return contemplates the development of a range of target operating returns expressed as a percentage of premium. The process of developing the range of target operating returns would first involve the selection of a range of total rates of return on net worth by reference to cost of capital or comparable industry returns analyses on an all-lines, all-states basis for a company group or, on an industry-wide basis for a particular line and state. This range of total returns can then be converted to a range of operating returns expressed as a percentage of premium. This process allows one to check or confirm the range of target operating returns for consistency with investor expectations on an overa11 basis and also allows a comparison with returns in other industries. However. in directly proposing or regulating the rates of any individual company, in any one state or line, the operating return range would be the one and only standard used.
