CAS Board Responds to Member/Regulator Feedback on Rescinded Ratemaking Principles
CAS engages with American Academy of Actuaries to develop a document that integrates ratemaking guidance across Actuarial Standards of Practice
Last year, the CAS announced that the Board of Directors unanimously approved rescinding the three CAS Statements of Principles related to ratemaking, reserving, and valuation. Since then, some members and other stakeholders have raised concerns with the Board’s action, specifically related to the Statement of Principles regarding Property and Casualty Insurance Ratemaking (Ratemaking Principles). This follow-up to the original announcement is intended to provide an update on recent Board action and further insights into the Board’s decision.
The Board recognized that CAS members felt that they were excluded from the decision to rescind the Ratemaking Principles, so the Board recently invited feedback from all stakeholders. Sixteen comment letters were submitted, and the Board discussed the arguments for and against reinstating the Ratemaking Principles during its March 27 meeting. Comments for reinstating the Ratemaking Principles included:
- The Ratemaking Principles are frequently referenced by CAS members to support rate filings, in litigation, and for expert testimony.
- The Statement of Principles is the only document that defines when a rate is “not excessive, inadequate, or unfairly discriminatory.”
- The Statement of Principles provide a concise and understandable explanation of actuarial ratemaking.
Others commented that:
- Matters of actuarial discipline consider the Actuarial Standards of Practice (ASOP), not the Statement of Principles; the principles do not have binding authority like Actuarial Standards of Practice or state laws.
- The definition of when a rate is considered “not excessive, inadequate or unfairly discriminatory” is when “it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.” This is an overly simplified view and the ASOPs provide more current guidance.
- The Ratemaking Principles address a public policy issue, and the CAS does engage in public policy issues, per the CAS Constitution.
The Board acknowledged that the Ratemaking Principles offer a convenient summary of core ratemaking concepts in one easy-to-read document, as opposed to across multiple Actuarial Standards of Practice (ASOP), and that this was especially helpful for non-actuaries and regulators.
So, while there was unanimous agreement among the Board that it should not reinstate the Ratemaking Principles, the Board committed to pursuing development of a document that integrates rating guidance across the relevant ASOPs for actuaries practicing in the United States.
The Board unanimously passed the following motion during its March 27 meeting:
That the Board will formally request the American Academy of Actuaries develop a Practice Note on P/C insurance ratemaking to integrate the guidance amongst the various Actuarial Standards of Practice.
The Academy’s Casualty Practice Council has been contacted with this request and is considering the development of such a document.
In addition, the Board agreed that the three rescinded Statements of Principles will be made accessible through the CAS website as historical documents.
Actuaries are required to adhere to the high standards of conduct, practice, and qualifications of the actuarial profession. According to the Code of Professional Conduct, “Laws may also impose obligations upon an Actuary. Where requirements of Law conflict with the Code, the requirements of Law shall take precedence. An Actuary must be familiar with, and keep current with, not only the Code, but also applicable Law and rules of professional conduct for the jurisdictions in which the Actuary renders Actuarial Services.” Since CAS members practicing in the United States must follow applicable insurance regulations, the Board concluded that rescinding the Principles would not change required actuarial practice. The CAS Board continues to believe that Actuarial Standards of Practice and the Code of Professional Conduct play a crucial role in upholding the professionalism of actuaries.
As further background, the CAS Board has been considering actions related to the Principles dating back to 2011, when it convened a task force to review and update the Principles. Because the Principles were created before any Standards of Practice were developed or promulgated by the Actuarial Standards Board, the Principles contained several instances of standards-type concepts and language. The adoption of the 50+ Actuarial Standards of Practice in the United States over the past 30 years, as well as the adoption of standards in many other jurisdictions, had resulted in considerable overlap between certain standards and the Principles. Therefore, the task force was charged with revising the Principles to contain Principles only, and not Standards of Practice. The Board further directed that conflicts between the Principles and more current material in Standards should be resolved in favor of the more current interpretation.
The Board held many discussions regarding the future of the Principles since the Task Force was first convened in 2011 and released several alternative drafts of the Ratemaking Principles while inviting member feedback. At the same time, the Board was aware that the Actuarial Standards Board was developing a new Standard of Practice addressing material covered in the Ratemaking Principles. The adoption of the Standard of Practice on Estimating Future Costs for Prospective Property/Casualty Risk Transfer and Risk Retention (ASOP 53), which includes guidance in each area included in the considerations section of the Ratemaking Principles, created further overlap and potential confusion.
As the Board considered the necessity of maintaining the Principles, an analysis commissioned by the Board found that in the United States, several Actuarial Standards of Practice for Ratemaking, specifically ASOPs 12, 13, 35, 29, and 53, overlap the Statements of Principles.
The Board also reviewed an analysis of state insurance regulations, specifically related to the most oft-cited section of the Ratemaking Principles that defines when a rate is “not excessive, inadequate, or unfairly discriminatory.” The analysis found that almost all 50 states plus the District of Columbia specifically state that rates should not be excessive inadequate, or unfairly discriminatory in their filing regulations, and in fact, this language preceded the Statements of Principles.
A paper published on the NAIC website, “Principles of State Insurance Unfair Discrimination Law,” describes the origins of the "not unfairly discriminatory" statutes. “The unfair discrimination statutes resulted from the 1945 McCarran-Ferguson Act’s direction to the states to implement cost-based pricing requirements for insurer discrimination practices. Senator McCarran explained that his ‘bill would…prevent…unjust discrimination’; it did so, the NAIC explained, by requiring the states to pass laws patterned after “the rationale of” the Robinson-Patman Anti-Discrimination Act [of 1936], a consumer protection law under which, “if the costs are the same, the seller cannot discriminate price.” Principle 4 in the 1988 Ratemaking Principles mirrors this cost-based mandate.
Further, the paper cites an NAIC paper published in 1974 that states, “Following the McCarran-Ferguson Act of 1945, “every state…adopted both fire and casualty insurance rating laws,” the “great majority” of which “were patterned after the Commissioners-All Industry model bills,” which include the core requirement that “rates shall not be excessive, inadequate or unfairly discriminatory.” [Hanson, Dineen, and Johnson, Monitoring Competition: A Means of Regulating the Property and Liability Insurance Business, National Association of Insurance Commissioners (1974) p. 30-31.]
After much consideration over many years, the CAS Board ultimately determined that the Principles were no longer necessary and that rescinding them will eliminate any confusion that may have existed between actuarial principles and actuarial standards.