{ "id": 11652246, "name": "STATE OF NORTH CAROLINA EX REL. COMMISSIONER OF INSURANCE, Appellee v. NORTH CAROLINA RATE BUREAU, Appellant IN THE MATTER OF THE FILING DATED MAY 1, 1995 AND AMENDED APRIL 1, 1996 BY THE NORTH CAROLINA RATE BUREAU FOR REVISED AUTOMOBILE INSURANCE RATES-PRIVATE PASSENGER CARS AND MOTORCYCLES", "name_abbreviation": "State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau", "decision_date": "1998-06-16", "docket_number": "No. COA97-352", "first_page": "662", "last_page": "675", "citations": [ { "type": "official", "cite": "129 N.C. App. 662" } ], "court": { "name_abbreviation": "N.C. Ct. App.", "id": 14983, "name": "North Carolina Court of Appeals" }, "jurisdiction": { "id": 5, "name_long": "North Carolina", "name": "N.C." }, "cites_to": [ { "cite": "335 S.E.2d 319", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1985, "opinion_index": 0 }, { "cite": "314 N.C. 547", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 4696490, 4687151, 4696345, 4688826, 4686907 ], "year": 1985, "opinion_index": 0, "case_paths": [ "/nc/314/0547-04", "/nc/314/0547-01", "/nc/314/0547-02", "/nc/314/0547-03", "/nc/314/0547-05" ] }, { "cite": "331 S.E.2d 124", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1985, "pin_cites": [ { "page": "141" }, { "page": "141" } ], "opinion_index": 0 }, { "cite": "75 N.C. App. 201", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8525529 ], "weight": 2, "year": 1985, "pin_cites": [ { "page": "224-225" }, { "page": "225" } ], "opinion_index": 0, "case_paths": [ "/nc-app/75/0201-01" ] }, { "cite": "N.C. Gen. Stat. \u00a7 58-36-10", "category": "laws:leg_statute", "reporter": "N.C. Gen. Stat.", "year": 1994, "pin_cites": [ { "page": "(2)" } ], "opinion_index": 0 }, { "cite": "481 S.E.2d 85", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1977, "opinion_index": 0 }, { "cite": "345 N.C. 631", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 53841 ], "year": 1977, "opinion_index": 0, "case_paths": [ "/nc/345/0631-01" ] }, { "cite": "468 S.E.2d 279", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1996, "pin_cites": [ { "page": "281" } ], "opinion_index": 0 }, { "cite": "122 N.C. App. 150", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 11916055 ], "year": 1996, "pin_cites": [ { "page": "153" } ], "opinion_index": 0, "case_paths": [ "/nc-app/122/0150-01" ] }, { "cite": "273 S.E.2d 300", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1980, "pin_cites": [ { "page": "444" } ], "opinion_index": 0 }, { "cite": "301 N.C. 107", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8564256, 8564233, 8564290, 8564187 ], "year": 1980, "opinion_index": 0, "case_paths": [ "/nc/301/0107-03", "/nc/301/0107-02", "/nc/301/0107-04", "/nc/301/0107-01" ] }, { "cite": "269 S.E.2d 547", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 7, "year": 1980, "pin_cites": [ { "page": "587" }, { "page": "586" }, { "page": "585", "parenthetical": "citations omitted" }, { "page": "589-590" }, { "page": "589" }, { "page": "589-590" } ], "opinion_index": 0 }, { "cite": "300 N.C. 381", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8562647 ], "weight": 2, "year": 1980, "pin_cites": [ { "page": "446" }, { "page": "450-451" } ], "opinion_index": 0, "case_paths": [ "/nc/300/0381-01" ] }, { "cite": "165 S.E.2d 207", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 3, "year": 1969, "pin_cites": [ { "page": "224" }, { "page": "219" } ], "opinion_index": 0 }, { "cite": "275 N.C. 15", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8557738 ], "weight": 2, "year": 1969, "pin_cites": [ { "page": "39" }, { "page": "32" } ], "opinion_index": 0, "case_paths": [ "/nc/275/0015-01" ] }, { "cite": "234 S.E.2d 720", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1977, "pin_cites": [ { "page": "726" } ], "opinion_index": 0 }, { "cite": "292 N.C. 471", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8571182 ], "year": 1977, "pin_cites": [ { "page": "483" } ], "opinion_index": 0, "case_paths": [ "/nc/292/0471-01" ] }, { "cite": "N.C. Gen. Stat. \u00a7 58-2-90", "category": "laws:leg_statute", "reporter": "N.C. Gen. Stat.", "year": 1994, "pin_cites": [ { "page": "(e)" } ], "opinion_index": 0 }, { "cite": "N.C. Gen. Stat. \u00a7 58-2-80", "category": "laws:leg_statute", "reporter": "N.C. Gen. Stat.", "year": 1994, "opinion_index": 0 }, { "cite": "385 S.E.2d 510", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1989, "pin_cites": [ { "page": "511" } ], "opinion_index": 0 }, { "cite": "96 N.C. App. 220", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8521089 ], "year": 1989, "pin_cites": [ { "page": "221" } ], "opinion_index": 0, "case_paths": [ "/nc-app/96/0220-01" ] }, { "cite": "486 S.E.2d 217", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 3, "year": 1997, "pin_cites": [ { "parenthetical": "citations omitted" } ], "opinion_index": 0 }, { "cite": "346 N.C. 184", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 139360, 139401, 139505, 139350, 139320 ], "year": 1997, "opinion_index": 0, "case_paths": [ "/nc/346/0184-04", "/nc/346/0184-01", "/nc/346/0184-02", "/nc/346/0184-05", "/nc/346/0184-03" ] }, { "cite": "478 S.E.2d 794", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 11, "year": 1996, "pin_cites": [ { "page": "797" }, { "page": "802" }, { "page": "802" }, { "page": "799" }, { "page": "799" }, { "page": "799" }, { "page": "799-800" }, { "page": "800" }, { "page": "801" }, { "page": "803", "parenthetical": "citations omitted" }, { "page": "805" } ], "opinion_index": 0 }, { "cite": "124 N.C. App. 674", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 11890484 ], "weight": 4, "year": 1996, "pin_cites": [ { "page": "678" }, { "page": "685" }, { "page": "681" }, { "page": "687-688" } ], "opinion_index": 0, "case_paths": [ "/nc-app/124/0674-01" ] }, { "cite": "193 S.E.2d 432", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1972, "pin_cites": [ { "page": "435" } ], "opinion_index": 1 }, { "cite": "16 N.C. App. 724", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8554533 ], "year": 1972, "pin_cites": [ { "page": "729" } ], "opinion_index": 1, "case_paths": [ "/nc-app/16/0724-01" ] }, { "cite": "273 S.E.2d 300", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1980, "pin_cites": [ { "page": "443" } ], "opinion_index": 1 }, { "cite": "301 N.C. 107", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8564256, 8564233, 8564290, 8564187 ], "year": 1980, "opinion_index": 1, "case_paths": [ "/nc/301/0107-03", "/nc/301/0107-02", "/nc/301/0107-04", "/nc/301/0107-01" ] }, { "cite": "269 S.E.2d 547", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 3, "year": 1980, "pin_cites": [ { "page": "587" }, { "page": "585" }, { "page": "686" } ], "opinion_index": 1 }, { "cite": "300 N.C. 381", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8562647 ], "weight": 2, "year": 1980, "pin_cites": [ { "page": "446" }, { "page": "444" } ], "opinion_index": 1, "case_paths": [ "/nc/300/0381-01" ] }, { "cite": "165 S.E.2d 207", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1969, "pin_cites": [ { "page": "224" } ], "opinion_index": 1 }, { "cite": "275 N.C. 15", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8557738 ], "year": 1969, "pin_cites": [ { "page": "39" } ], "opinion_index": 1, "case_paths": [ "/nc/275/0015-01" ] } ], "analysis": { "cardinality": 974, "char_count": 32026, "ocr_confidence": 0.757, "pagerank": { "raw": 1.2672472022667076e-07, "percentile": 0.6138471779628851 }, "sha256": "6e9ebfc171ff59facacd159a7bde10a421bbd8a768368ba7ebe347696c6d6e12", "simhash": "1:21294718202d060f", "word_count": 5040 }, "last_updated": "2023-07-14T18:14:06.814789+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [ "Judge JOHN concurs.", "Judge GREENE dissents in part with separate opinion." ], "parties": [ "STATE OF NORTH CAROLINA EX REL. COMMISSIONER OF INSURANCE, Appellee v. NORTH CAROLINA RATE BUREAU, Appellant IN THE MATTER OF THE FILING DATED MAY 1, 1995 AND AMENDED APRIL 1, 1996 BY THE NORTH CAROLINA RATE BUREAU FOR REVISED AUTOMOBILE INSURANCE RATES-PRIVATE PASSENGER CARS AND MOTORCYCLES" ], "opinions": [ { "text": "MARTIN, Mark D., Judge.\nOn 1 April 1996, amending its 1 May 1995 filing, the North Carolina Rate Bureau (Bureau) filed a request to increase automobile insurance rates. Included was a request to increase rates for private passenger car insurance by 5.7% and motorcycle insurance by 10.1%. The North Carolina Insurance Commissioner (Commissioner) conducted hearings beginning 9 July 1996 and concluding 20 August 1996. The Commissioner heard testimony from five Department of Insurance (Department) expert witnesses and six Bureau experts and received 61 Department and 87 Bureau exhibits into evidence. The hearing transcript was approximately 3600 pages in length. By orders dated 4 October 1996 and 31 October 1996 the Commissioner disapproved the proposed rate changes and instead ordered a rate reduction for cars of -8.3% and a rate increase for motorcycles of 3.2%. From these orders, the Bureau appeals.\nIn reviewing orders of the Commissioner we must examine the whole record and determine whether the Commissioner\u2019s conclusions of law are supported by material and substantial evidence. State ex rel. Comr. of Ins. v. N.C. Rate Bureau, 124 N.C. App. 674, 678, 478 S.E.2d 794, 797 (1996), disc. review denied, 346 N.C. 184, 486 S.E.2d 217 (1997). Substantial evidence is defined as \u201csuch relevant evidence as a reasonable mind might accept as adequate to support a conclusion . . . [but] more than a scintilla or a permissible inference.\u201d Id. (citations omitted). When there is conflicting evidence in the record, it is not this Court\u2019s function to substitute its judgment for that of the Commissioner, since the \u201cweight and sufficiency of the evidence as well as the credibility of the witnesses are determined by the Commissioner.\u201d Id. (citing State ex rel. Comr. of Insurance v. N.C. Rate Bureau, 96 N.C. App. 220, 221, 385 S.E.2d 510, 511 (1989)). Any order of the Commissioner that is supported by substantial evidence is presumed correct, N.C. Gen. Stat. \u00a7 58-2-80 (1994), and the rates fixed by the Commissioner\u2019s order areprima facie correct. N.C. Gen. Stat. \u00a7 58-2-90(e) (1994).\nI.\nThe Bureau first contends the Commissioner erred as a matter of law by considering investment income on capital and surplus in his ratemaking calculations. Specifically, the Bureau alleges that the Commissioner improperly \u201creduc[ed] his target return from a return equal to industries of comparable risk to a return on operations alone\u201d and as a result impliedly considered the invalid information in his calculation.\nNorth Carolina law requires that regulated insurance rates be adequate to provide the industry a fair and reasonable profit. Comr. of Insurance v. Rating Bureau, 292 N.C. 471, 483, 234 S.E.2d 720, 726 (1977). The ultimate question for the Commissioner\u2019s determination is whether the proposed rates will, after provision for reasonably anticipated losses and operating expenses, leave the insurers a fair and reasonable profit and no more. Id. Determining a fair and reasonable profit \u201cinvolves consideration of profits accepted by the investment market as reasonable in business ventures of comparable risk.\u201d In re Filing by Fire Ins. Rating Bureau, 275 N.C. 15, 39, 165 S.E.2d 207, 224 (1969).\nInsurance companies derive their returns from two branches of the insurance business \u2014 returns generated by the profits earned by insurance operations including investment income on reserves, and returns generated by the profits earned by investing capital and surplus funds. Comr. of Insurance v. Rate Bureau, 300 N.C. 381, 446, 269 S.E.2d 547, 587, reh\u2019g denied, 301 N.C. 107, 273 S.E.2d 300 (1980). In order to make a comparison with industries of comparable risk, the Commissioner attempted to combine these two branches and compare this total return of the insurance industry to total returns of other industries. When setting insurance rates, however, income from invested capital and surplus cannot be considered. Id. at 444, 269 S.E.2d at 586. This fundamental rule is justified, at least in part, because \u201cthe required capital assets of a casualty insurance company are primarily reserves to guarantee its ability to discharge its liability rather than for use as working capital in the prosecution of its business.\u201d Id. at 442, 269 S.E.2d at 585 (citations omitted). Accordingly, a fair and reasonable profit must be calculated without considering investment income from capital and surplus while considering the returns of businesses of comparable risk.\nIn State ex rel. Comr. of Ins. v. N.C. Rate Bureau, 124 N.C. App. at 685, 478 S.E.2d at 802, the Commissioner used a methodology that included a line item and calculation for \u201cIncome from Capital and Surplus.\u201d We remanded his order for recalculation using a formula that excluded investment income earned on capital and surplus. Id. at 685-686, 478 S.E.2d at 802. The Commissioner\u2019s attempt to distinguish his present methodology is unpersuasive.\nIn his brief, the Commissioner explains that in the earlier case he found the target total return of the insurance industry based on the total returns of industries of comparable risk. He then subtracted the investment income on capital and surplus from this total return and arrived at a total return on insurance operations. This return on operations was used to derive the profit provisions.\nIn the present case, the Commissioner started with a direct estimate and justification of the return on operations, rather than a total return, and derived his profit provisions from this estimated return on operations without explicitly including investment income from capital or surplus in his calculations.\nThe Bureau argues that the Commissioner simply \u201crepackaged\u201d his calculations by starting with a return on operations as his target in order to avoid the appearance of explicitly considering investment income on capital and surplus, but in essence accomplished exactly what we have previously disallowed. We agree.\nThe Commissioner admits in his brief that his 5.7% \u201creturn on operations may be tested to ensure that it will result in a \u2018total return\u2019 commensurate with the \u2018total return\u2019 of businesses of comparable risk by adding the income from capital and surplus to the return on operations.\u201d Indeed, the Commissioner further acknowledges he \u201cperformed this test and determined that the return on operations of 5.7% combined with the income from capital and surplus would result in a \u2018total return\u2019 of 13%, which is in the range of returns earned by other industries.\u201d\nWe are bound by the decisions of our Supreme Court and must reject the Commissioner\u2019s creative attempt to deviate from such precedent. Mahoney v. Ronnie\u2019s Road Service, 122 N.C. App. 150, 153, 468 S.E.2d 279, 281 (1996), aff\u2019d per curiam, 345 N.C. 631, 481 S.E.2d 85 (1977). Therefore, we hold that the Commissioner improperly considered income from capital and surplus in arriving at his total return and remand for recalculation.\nII.\nThe Bureau next contends the Commissioner improperly failed to reflect expected values for policyholder dividends and rate deviations in his rate calculations and consequently ordered rates that do not comply with statutory requirements. Specifically, the Bureau argues that dividends and deviations must be explicitly reflected in calculating rates and not classified as profit.\nIn his order, the Commissioner stated:\nThe argument between the parties, pared down to its simplest form, is whether the prospective rate level should be determined by the actual revenue retained by insurers at the end of the period or whether the prospective rate level should be set without regard to the discretionary collection and retention of premiums by insurers. In other words, the question is whether insurers\u2019 profit is the amount they have left after they have granted deviations and paid out policyholder dividends or whether insurers\u2019 profit is measured to include deviations and policyholder dividends.\nThe Commissioner found the average rate already included a built-in provision for dividends and deviations of approximately 5% of the premium and that the Bureau\u2019s attempts to apply an additional rate increase for the explicit purpose of paying dividends and deviations would lead to an upward spiral in rates by essentially counting these factors twice.\nNorth Carolina law requires \u201ca uniform premium rate schedule for all companies operating in the State.\u201d In re Filing by Fire Ins. Rating Bureau, 275 N.C. at 32, 165 S.E.2d at 219. \u201cFor rate making purposes, the Bureau is to be regarded as if it were the only insurance company operating in North Carolina and as if it had . . . experience, . . . equivalent to the composite of the companies actually in operation.\u201d Id. In setting this average schedule \u201cdue consideration\u201d must be given to dividends and deviations in ruling on the rate request. N.C. Gen. Stat. \u00a7 58-36-10(2) (1994).\nAs previously stated by this Court, \u201c \u2018due consideration\u2019 does not mandate that a numerical adjustment to the rates must be made to reflect the effects of dividends and deviations.\u201d Comr. of Ins., 124 N.C. App. at 681, 478 S.E.2d at 799. N.C. Gen. Stat. section 58-36-10 only requires that the Commissioner give \u2018due consideration\u2019 to rating criteria such as dividends and deviations. \u201c \u2018Nothing in the language of the statute requires that the Commissioner provide for [dividends and deviations] so long as the rate level established on the statutory rate criteria is not inadequate, excessive, or unfairly discriminatory.\u2019 \u201d Id. at 681-682, 478 S.E.2d at 799 (quoting State ex rel. Comr. of Insurance v. N.C. Rate Bureau, 75 N.C. App. 201, 224-225, 331 S.E.2d 124, 141, disc. review denied, 314 N.C. 547, 335 S.E.2d 319 (1985). \u201c[T]he General Assembly never intended \u2018to make any one, or all, of these matters [statutory rating standards] conclusive. . . . The weight to be given the respective factors is for the Commissioner to determine in the exercise of his sound discretion and expertise. ...\u201d\u2019 Id. at 682, 478 S.E.2d at 799 (quoting Comr. of Insurance, 75 N.C. App. at 225, 331 S.E.2d at 141).\nAccordingly, the Bureau\u2019s argument that dividends and deviations be explicitly reflected in the Commissioner\u2019s calculation is unfounded. The Commissioner need only give \u2018due consideration\u2019 to these factors and arrive at a rate that will leave insurers with a fair and reasonable profit. Id. at 682, 478 S.E.2d at 799-800. The Bureau\u2019s contention that dividends and deviations be reflected as an expense, rather than in the margin for underwriting profit, has been rejected by this Court. Id. at 682, 478 S.E.2d at 800. Although we so held, we remanded the case to allow the Commissioner to make more specific findings showing the facts upon which he based his decision that the rate contained a 4.96% margin for dividends and deviations. Id. at 684, 478 S.E.2d at 801. In the present case, the Commissioner concluded that the rate contained a 5% margin. In his order he found\n[u]sing the historical results in the evidence supplied by the Bureau, it appears that a reasonable margin has been included in prior rates for the accumulation of surplus for the payment of dividends and deviations even without the extra explicit expense load provision for dividends and a reduction in manual premiums for deviations, as set forth in this filing. These margins were provided by an average manual premium. The provision for dividends and deviations contained within the average manual rate is approximately 5% of premium. This value is based upon the various savings for insurance companies related to losses and expenses that are lower than the average value contained in the manual rates. The Commissioner finds and concludes that any margin for the payment of dividends and deviations in excess of the margin provided for in the average manual premium is unreasonable and produces rates that are excessive and unfairly discriminatory. Based on the foregoing, the Commissioner finds that a profit provision of -4.0% for liability and +1.6% for physical damage will provide approximately 5% of manual premiums, or approximately $100 million, that may be paid as a dividend and/or deviated as a savings to insureds, assuming the same book of business. The approximately 5% of premium or approximately $100 million provided in the average manual rate for policyholder dividends and deviations is reasonable, adequate and is provided in the rates which are adopted and approved hereinafter by this Order and which are not inadequate, excessive, or unfairly discriminatory.\nWe conclude there is substantial evidence to support the Commissioner\u2019s findings regarding dividends and deviations. In the words of one Department expert:\nAt all times there are some more efficient and some less efficient companies in any market. Under North Carolina ratemaking procedures, rates reflect average expenses. This \u201cpenalizes\u201d inefficient high cost companies and encourages them to improve. At the same time it provides \u201crewards\u201d to efficient low cost companies, which allows them to provide dividends and deviations to attract and retain new policyholders. If these dividends and deviations were allowed to become a rate increment for all companies, that would undermine the economic incentives of this \u201cpenalty-reward\u201d system. If companies use their efficiency \u201crewards\u201d to fund deviation and dividend programs to attract policyholders, and those dividends and deviations are subsequently added as an additional increase in computing new rates, the resulting new, higher rates would generate even larger profits, thus providing a basis for larger dividends and deviations and, as a result, even higher rates and so on. Under such a procedure, the connection between actual requirements (to cover losses and expenses) and allowed rates would quickly deteriorate and rate regulation would become a pointless exercise.\nWhen asked to explain how manual rates based on average cost projections allow insurance companies to use deviations and dividends, another Department expert stated:\nThere are a number of sources within an average rate that allow individual insurance companies to use deviations and dividends. These sources include: (1) Expected losses for individual insurance companies that are lower than average, (2) Expected expenses for individual insurance companies that are lower than average, (3) A particular insurance company willing to accept a lower than expected average profit, (4) The actual aggregate experience for a period turning out to be more favorable than expected, and (5) The cost projections underlying the manual rates being favorable towards insurance companies.\nHaving reviewed the provision for deviations and dividends contained within a manual rate based upon average cost projections, the expert stated that based on several of these factors \u201cthe provision for deviations and dividends contained within the average rate level is about 5% of premium. This value is based upon the various savings for insurance companies related to losses and expenses that are lower than the average value contained in the manual rates.\u201d\nIn essence, the Commissioner found that because an average rate is used, some companies will do better than average and others will not. Consequently, those who do better will be able to grant dividends and deviations of up to 5% of premium. Based on the historic figures provided by both parties and future projections, the 5% of premium will generate approximately $100 million, which the Commissioner concluded is a reasonable and adequate amount. After careful review of the record and the arguments contained therein, we do not believe the Commissioner erred in his findings and conclusions.\nIII.\nFinally, the Bureau contends the Commissioner erred in ordering underwriting profit provisions that ignore the actual structure of the insurance industry and will not generate a fair and reasonable profit. Specifically, (A) the Commissioner gave the industry a return on only a portion of its assets by applying his selected target return to the industry\u2019s statutory surplus rather than its net worth and by using a hypothetical premium-to-surplus ratio instead of the actual rate; and (B) the Commissioner erred in assuming an effective tax rate on investment income inconsistent with the makeup of the industry\u2019s actual investment portfolio.\nA.\nFirst, the Bureau contends the Commissioner\u2019s rates provided his target return on only a portion of the industry\u2019s assets. It argues the Commissioner established underwriting profit provisions designed to give the insurance industry a return on its statutory surplus \u2014 the measure of the industry\u2019s equity under Statutory Accounting Practices (SAP), rather than the more appropriate Generally Accepted Accounting Principles (GAAP).\nThe Commissioner is considered an expert in the field of insurance and his reliance on various methods of analysis of the profit to which the insurance companies are entitled lies entirely within his discretion. ... We find there is substantial and material evidence to support the Commissioner\u2019s use of SAP in calculating the profit provisions. Not only was there expert testimony that SAP was the appropriate method, but as the Commissioner pointed out in his order, even our statutes refer to the accounting practices set forth by the NAIC (i.e. SAP system) in requiring insurance companies to evaluate and make regular reports of their financial positions. Additionally, the Commissioner reasons that since SAP represents that level of financial commitment an insurance company is legally required to make to its policyholders, it is a logical foundation upon which to base a rate of return in determining \u201ca fair and reasonable profit and no more.\u201d \u201cAs we do not find error in the Commissioner\u2019s judgment we cannot replace our judgment for his.\u201d\nComr. of Ins., 124 N.C. App. at 687-688, 478 S.E.2d at 803 (citations omitted).\nIn the present case, the Commissioner made similar findings justifying his decision to use SAP rather than GAAP. We find the Bureau\u2019s attempts to distinguish the present situation unpersuasive.\nThe Bureau also argues the Commissioner improperly used a hypothetical premium-to-surplus ratio that further reduced the industry\u2019s asset base. It contends there was no evidence the actual premium-to-surplus ratio for companies writing auto insurance in North Carolina would be greater than 1.75 to 1, and by using the hypothetical 2 to 1 ratio, the Commissioner assumed the companies had less surplus than they actually did and thereby allowed a return on only a portion of the industry\u2019s assets.\nWe have previously held\nthere was substantial evidence to support the Commissioner\u2019s selection of a 2 to 1 premium-to-surplus ratio. The 2 to 1 ratio is a traditional standard for the premium-to-surplus ratio and several expert witnesses used this 2 to 1 ratio in their calculations. Additionally, there was testimony that it is more appropriate to use a normative ratio than an historical one when determining rates on a prospective basis. We agree with the Commissioner there is no evidence of error as a matter of law; there is neither a statutory mandate for a premium-to-surplus ratio nor anything to preclude the Commissioner\u2019s use of a hypothetical normative premium-to-surplus ratio as opposed to the actual ratio so long as there is substantial evidence to support the Commissioner\u2019s selection.\nId. at 691, 478 S.E.2d at 805. Similar evidence was presented to the Commissioner in the present case. In addition, several experts testified that the 2 to 1 ratio was appropriate. The Bureau\u2019s historical ratio of 1.75 to 1 was based on the 1994 countrywide all-lines ratio, rather than a ratio limited to North Carolina and to automobile insurance. There was no guarantee such a ratio would reflect the future allocation of surplus to the North Carolina automobile insurance line. Evidence was also presented showing that the North Carolina automobile insurance industry experienced less risk than the automobile insurance industry in general, and consequently, a higher ratio which allocates fewer assets to cover the risk of loss would be appropriate. As in our prior decision, we hold there is material and substantial evidence to support the Commissioner\u2019s use of the normative ratio.\nB.\nFinally, the Bureau argues the Commissioner erred in adopting a 20% effective tax rate for investment income. In its filing, the Bureau calculated an effective tax rate of 24.37% for investment income based upon the taxes it anticipated paying on what it contended was the actual investment portfolio held by the industry. The 20% figure, according to the Bureau, was assumed by the Commissioner to be the effective tax rate, and failed to account for the actual investment portfolio of the industry.\nAlthough the record reflects that the investment portfolio used by the Bureau to calculate its tax rate was the actual portfolio for the industry in 1994, there was no guarantee it would be the actual portfolio in 1997, the period for which the prospective rates were set. The Commissioner\u2019s rate, on the other hand, was prospective and based on a mix of tax-exempt and taxable securities which Department experts considered relevant and appropriate. In addition, it appears the portfolio mix used by the Bureau to calculate its 1994 effective tax rate was based on data for the countrywide property and casualty industry, which may not reflect the mix of assets attributable to the North Carolina automobile insurance industry.\nThe Bureau cites Comr. of Insurance, 300 N.C. at 450-451, 269 S.E.2d at 589-590, as authority for its contention that the Commissioner is required to make rates for the industry as it actually exists. The holding in that case, however, was based upon a statutory mandate that the insurance industry invest in certain types of securities which, in setting the prospective rates, created a certainty that the investment portfolio of the future would include only those types of securities dictated by statute. Id. Former N.C. Gen. Stat. section 58-79.1 required insurance companies to invest their funds in certain designated stocks. Id. at 450, 269 S.E.2d at 589. The Court concluded that it could not have been the legislative intent to require investments in designated securities only \u201cand then require that. . . underwriting profits shall be computed on the hypothetical assumption that they were invested in something else.\u201d Id. at 450-451, 269 S.E.2d at 589-590. In the present action, there was no certainty as to the proportion of taxable and tax-exempt securities that the industry would hold, and, therefore, the \u201cactual\u201d investment portfolio of 1994 upon which the Bureau\u2019s tax rate was based need not have been the investment portfolio attributable to the North Carolina automobile insurance line in 1997. Accordingly, we conclude the Commissioner did not err as a matter of law in establishing an effective tax rate of 20%, and his decision was supported by material and substantial evidence.\nWe have carefully reviewed the Bureau\u2019s remaining assignments of error and find them to be without merit.\nAffirmed in part, reversed in part, and remanded.\nJudge JOHN concurs.\nJudge GREENE dissents in part with separate opinion.", "type": "majority", "author": "MARTIN, Mark D., Judge." }, { "text": "Judge Greene\ndissenting in part.\nI do not agree with the majority that the \u201cCommissioner improperly considered income from capital and surplus in arriving at his total return\u201d and that remand is necessary for a recalculation of. the automobile insurance rates. Otherwise, I fully concur with the majority.\nThe issue raised in this appeal is how the Commissioner is to calculate a fair and reasonable profit provision for automobile insurance companies.\nThe parties do not dispute and our courts have long recognized that the \u201cinsurance business is divided into two separate and distinct branches, (1) the underwriting business and (2) the investment business.\u201d Comr. of Insurance v. Rate Bureau, 300 N.C. 381, 446, 269 S.E.2d 547, 587, reh\u2019g denied, 301 N.C. 107, 273 S.E.2d 300 (1980). The North Carolina Rate Bureau (Bureau) contends that the law of this State requires automobile insurance rates to be established so that insurance companies receive a profit on their underwriting business that is equal to the total profit received by other industries of comparable risk. The North Carolina Insurance Commissioner (Commissioner) argues that the establishment of automobile insurance rates in the manner suggested by the Bureau would be inconsistent with the laws of this State and would \u201cprovide insurance companies with a return in excess of the returns earned by industries of comparable risk and will result in excessive rates.\u201d I agree with the Commissioner.\nAutomobile insurance rates must be \u201cadequate to produce a fair and reasonable [underwriting] profit.\u201d Id. at 443, 269 S.E.2d at 585 (quoting Comr. of Insurance v. Attorney General, 16 N.C. App. 724, 729, 193 S.E.2d 432, 435 (1972)). The question of whether the rate is \u201cfair and reasonable\u201d is a question of fact for the Commissioner which \u201cinvolves consideration of profits accepted by the investment market as reasonable in business ventures of comparable risk.\u201d In re Filing by Fire Ins. Rating Bureau, 275 N.C. 15, 39, 165 S.E.2d 207, 224 (1969).\nIn this case, the Commissioner determined that a 5.7 percent return on an automobile insurance company\u2019s underwriting business was a fair and reasonable profit provision. After making that determination, the Commissioner \u201ctested\u201d his decision by comparing the 5.7 percent return on underwriting with the total return (underwriting and investments) of other businesses of comparable risk. In making that comparison the Commissioner determined that the 5.7 percent return on underwriting when combined with return on investments of the insurance companies amounted to a total return for the insurance company within the range of the total return received by other businesses of comparable risk.\nThe procedure used by the Commissioner complies, as best as possible, with the somewhat conflicting directives of our courts: (1) set rates so as to produce a fair and reasonable profit on the underwriting portion of the automobile insurance business, and (2) set rates so as to provide the insurance company a profit consistent with profits from other businesses of comparable risk. The conflict in these directives arises because the profits from other businesses of comparable risk are usually not divided into underwriting and investments. Thus, to set the underwriting rates as suggested by the Bureau, consistent with other businesses, allows the automobile insurance company a return on its underwriting business equal to the total return of businesses of comparable risk. When that underwriting return is added to the return the insurance companies receive on their investments, they receive a return in excess of that received by comparable companies. For example: assume that the total return received by comparable companies is 13 percent. If automobile insurance rates axe established so as to provide the insurance company with an underwriting return of 13 percent, and the insurance company is also receiving a return of 7 percent on its business investments, then the total return for the insurance company would be 20 percent, an amount substantially in excess of the 13 percent total return of other comparable businesses. I simply do not believe that this result represents either the intent of our legislature or a proper construction of our case law.\nI would, therefore, affirm the order of the Commissioner.\n. Because the rate must provide a fair return on the underwriting business, return on investments held by the insurance company are not to be considered. Comr. of Insurance, 300 N.C. at 444, 269 S.E.2d at 686.", "type": "dissent", "author": "Judge Greene" } ], "attorneys": [ "North Carolina Department of Insurance by Kristin K. Eldridge and Sherri L. Hubbard for appellee Commissioner of Insurance.", "Young Moore and Henderson P.A. by R. Michael Strickland, William M. Trott, Marvin M. Spivey, Jr., and Terryn D. Owens for appellant North Carolina Rate Bureau." ], "corrections": "", "head_matter": "STATE OF NORTH CAROLINA EX REL. COMMISSIONER OF INSURANCE, Appellee v. NORTH CAROLINA RATE BUREAU, Appellant IN THE MATTER OF THE FILING DATED MAY 1, 1995 AND AMENDED APRIL 1, 1996 BY THE NORTH CAROLINA RATE BUREAU FOR REVISED AUTOMOBILE INSURANCE RATES-PRIVATE PASSENGER CARS AND MOTORCYCLES\nNo. COA97-352\n(Filed 16 June 1998)\n1. Insurance \u00a7 400 (NCI4th)\u2014 automobile rates \u2014 investment income on capital and surplus \u2014 improper consideration\nThe Commissioner of Insurance erred by considering investment income on capital and surplus in his calculation of a fair and reasonable profit in an automobile insurance rate case where the Commissioner determined that a return on operations of 5.7% combined with the income from capital and surplus would result in a total return of 13% which is commensurate with the total return of businesses of comparable risk.\n2. Insurance \u00a7 403 (NCI4th)\u2014 automobile rates \u2014 values for dividends and rate deviations\nThe Commissioner of Insurance did not fail to reflect expected values for policyholder dividends and rate deviations in an automobile rate case where the Commissioner found that the average rate already included a provision for dividends and deviations of approximately 5% of the premium; that because an average rate is used, some companies will do better than average and others will not; that those who do better will be able to grant dividends and deviations of up to 5% of the premium; and that the 5% of premium will generate $100 million, which is a reasonable and adequate amount. N.C.G.S. \u00a7 58-36-10(2).\n3. Insurance \u00a7 403 (NCI4th)\u2014 automobile rates \u2014 underwriting profit \u2014 statutory accounting practices\nThe Commissioner of Insurance had the discretion to use Statutory Accounting Practices rather than Generally Accepted Accounting Principles in establishing underwriting profit provisions in an automobile insurance rate case.\n4. Insurance \u00a7 403 (NCI4th)\u2014 automobile insurance \u2014 underwriting profit \u2014 normative premium-to-surplus ratio\nThe Commissioner of Insurance did not err by using a normative 2 to 1 premium-to-surplus ratio rather than the Rate Bureau\u2019s historical ratio of 1.75 to 1 in calculating underwriting profit provisions in an automobile insurance rate case where the historical 1.75 to 1 ratio was based on the 1994 countrywide all-lines ratio rather than a ratio limited to North Carolina and to automobile insurance, and evidence was presented showing that the North Carolina automobile insurance industry exp\u00e9rienced less risk than the automobile insurance industry in general so that a higher ratio which allocates fewer assets to cover the risk of loss would be appropriate.\n5. Insurance \u00a7 400 (NCI4th)\u2014 automobile rates \u2014 underwriting profit \u2014 tax rate for investment income\nThe Commissioner of Insurance did not err in adopting a 20% effective tax rate for investment income in determining underwriting profit in an automobile insurance rate case, although the Rate Bureau calculated an effective tax rate of 24.37% for investment income based upon anticipated taxes on the actual investment portfolio held by the industry in 1994, where there was no certainty that the 1994 portfolio would be the same as the actual portfolio in 1997, the period for which the prospective rates were set; the Commissioner\u2019s rate was prospective and based on a mix of tax-exempt and taxable securities which Department experts considered relevant and appropriate; and the portfolio mix used by the Rate Bureau to calculate its 1994 effective tax rate was based on data for the countrywide property and casualty industry and may not reflect the mix of assets attributable to the North Carolina automobile insurance industry.\nJudge Greene dissenting in part.\nAppeal by the North Carolina Rate Bureau from orders entered 4 October 1996 and 31 October 1996 by the North Carolina Commissioner of Insurance. Heard in the Court of Appeals 7 January 1998.\nNorth Carolina Department of Insurance by Kristin K. Eldridge and Sherri L. Hubbard for appellee Commissioner of Insurance.\nYoung Moore and Henderson P.A. by R. Michael Strickland, William M. Trott, Marvin M. Spivey, Jr., and Terryn D. Owens for appellant North Carolina Rate Bureau." }, "file_name": "0662-01", "first_page_order": 702, "last_page_order": 715 }