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  "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, 2001 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",
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    "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, 2001 BY THE NORTH CAROLINA RATE BUREAU FOR REVISED AUTOMOBILE INSURANCE RATES-PRIVATE PASSENGER CARS AND MOTORCYCLES"
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        "text": "EAGLES, Chief Judge.\nThe North Carolina Rate Bureau (\u201cBureau\u201d) appeals from an order entered by the North Carolina Commissioner of Insurance (\u201cCommissioner\u201d) that denied the Bureau\u2019s request for an adjustment in automobile insurance rates. The Bureau asserts four arguments on appeal: (1) the Commissioner improperly considered investment income on capital and surplus funds while deriving his underwriting profit provisions; (2) the Commissioner did not give due consideration to dividends and deviations; (3) the Commissioner overstated the amount of investment income generated from policyholder-supplied funds; and (4) the Commissioner improperly substituted his own ratemaking procedure. After careful review of the record, briefs and arguments of counsel, we discern no error and affirm the Commissioner\u2019s order.\nThe Bureau is a statutorily created entity. The Bureau was created by the General Assembly to replace and assume the duties of the North Carolina Automobile Rate Administrative Office, the North Carolina Fire Insurance Rating Bureau, and the Compensation Rating and Inspection Bureau of North Carolina. G.S. \u00a7 58-36-1(1) (2001). The Bureau is not an agency of the State. See Allstate Ins. Co. v. Lanier, 242 F. Supp. 73 (E.D.N.C. 1965), aff'd, 361 F.2d 870 (4th Cir.), cert. denied, 385 U.S. 930, 17 L. Ed. 2d 212 (1966). It represents the companies that sell automobile insurance in North Carolina, along with other types of insurers. See G.S. \u00a7 58-36-1(1).\nThe Commissioner of Insurance is an elected official of the State of North Carolina. G.S. \u00a7 58-2-5 (2001). The Commissioner\u2019s duties as chief officer of the Department of Insurance are broadly described as \u201cthe execution of laws relating to insurance.\u201d G.S. \u00a7 58-2-1 (2001). The North Carolina Supreme Court has listed the Commissioner\u2019s duties as follows:\n[F]aithfully executing all laws governing insurance companies and the authority to adopt rules to enforce that law; preventing practices injurious to the public; furnishing the necessary forms for statements required by companies, associations, orders, or bureaus; reporting to the Attorney General any violations of law relating to insurance companies; instituting civil actions or criminal prosecutions for violations of the insurance statutes; giving a statement or synopsis of any insurance contract upon proper application by any citizen; administering all oaths required in the discharge of his official duty; compiling and making available to the public the lists of rates charged, including explanations of coverages provided by insurers; and adopting rules governing what constitutes an uninsurable facility.\nState ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau, 350 N.C. 539, 541, 516 S.E.2d 150, 151 (\u201c1996 Auto\u201d) (citing G.S. \u00a7 58-2-40), reh\u2019g denied, 350 N.C. 852, 539 S.E.2d 11 (1999).\nAn insurance company may write insurance in North Carolina only after it has become a member of the Bureau. G.S. \u00a7 58-36-5 (2001). The Bureau files a rate change proposal with the Commissioner on behalf of its member companies. G.S. \u00a7 58-36-1(3) (2001). Any rate change must be approved by the Commissioner. G.S. \u00a7 58-36-70(a) (2001). If the Commissioner does not approve the Bureau\u2019s proposed rates, the Commissioner may set the insurance rates according to statute. G.S. \u00a7 58-36-70(d) (2001); see G.S. \u00a7 58-36-10 (2001).\nAfter the Commissioner enters an order that rejects the Bureau\u2019s ratemaking structure, the Bureau may appeal to this Court. G.S. \u00a7\u00a7 58-2-80, 58-36-25 (2001). The two most recent filings by the Bureau have resulted in appeals to this Court and the Supreme Court. The disagreement between the Bureau and the Commissioner regarding the legal significance of the two previous appeals forms the basis for the current appeal.\nThe Bureau filed a rate adjustment request for automobile insurance on 1 February 1994. The Commissioner entered an order on 28 September 1994 rejecting .the Bureau\u2019s rates and substituting a different schedule of rates. The Bureau appealed to this Court. In an opinion dated 17 December 1996, this Court remanded the case to the Commissioner with instructions to modify his order. The Commissioner issued a new, modified order on 10 September 1997. The 10 September 1997 order was reversed on appeal to this Court on 29 December 1998.\nWhile the 1994 filing proceeded on appeal, the Bureau filed for another rate change on 1 May 1995. The Bureau amended its filing on 1 April 1996. After hearings in July and August 1996, the Commissioner disapproved the Bureau\u2019s rate proposal. By orders issued on 4 October 1996 and 31 October 1996 the Commissioner lowered rates for car insurance by 8.3% and raised the motorcycle insurance rates by 3.2%. In an opinion filed on 16 June 1998, this Court reversed the Commissioner\u2019s orders in part and affirmed in part. The Supreme Court affirmed the Court of Appeals\u2019 opinion on 25 June 1999. Both the 1994 and 1996 rate filing disputes were eventually settled by the parties.\nThe Bureau filed the requested rate change at issue here on 1 May 2001. The filing requested an increase of 10.6% for private passenger automobile rates and a decrease of 2.4% for motorcycle rates. The Commissioner held a hearing on the matter from 25 September 2001 until 31 October 2001. The Bureau\u2019s filing was over 1,000 pages in length. The evidence included nearly seventy exhibits, testimony from nine expert witnesses and four additional witnesses. The Commissioner rejected the Bureau\u2019s requested rates in his order dated 14 December 2001. Instead, the Commissioner ordered a rate reduction of 13.0% for automobile rates and a reduction of 15.9% for motorcycles. The Bureau appeals from this order.\nWhen reviewing an order by the Commission, this Court \u201cmust examine the whole record and determine whether the Commissioner\u2019s conclusions of law are supported by material and substantial evidence.\u201d State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau, 129 N.C. App. 662, 664, 501 S.E.2d 681, 684 (1998) (\u201c1996 Auto-COA\u201d), aff\u2019d, 350 N.C. 539, 516 S.E.2d 150 (1999). \"The whole record test requires the reviewing court to consider the record evidence supporting the Commissioner\u2019s order, to also consider the record evidence contradicting the Commissioner\u2019s findings, and to determine if the Commissioner\u2019s decision had a rational basis in the material and substantial evidence offered.\u201d State ex rel. Comr. of Ins. v. Rate Bureau, 124 N.C. App. 674, 678, 478 S.E.2d 794, 797 (1996) (\u201c1994 Auto\u201d) (quoting State ex rel. Comr. of Insurance v. N.C. Rate Bureau, 75 N.C. App. 201, 208, 331 S.E.2d 124, 131, disc. rev. denied, 314 N.C. 547, 335 S.E.2d 319 (1985) (\u201c1983 Farm\u201d)), disc. rev. denied, 346 N.C. App. 184, 486 S.E.2d 217 (1997). \u201cSubstantial evidence is \u2018such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.\u2019 It is \u2018more than a scintilla or a permissible inference.\u2019 \u201d 1994 Auto, 124 N.C. App. at 678, 478 S.E.2d at 797 (citations omitted) (quoting Comr. of Insurance v. Automobile Rate Office, 287 N.C. 192, 205, 214 S.E.2d 98, 106 (1975)).\nThe Commissioner determines the weight and sufficiency of the evidence presented during the hearing, including the credibility of any witnesses. See State ex rel. Comr. of Insurance v. N. C. Rate Bureau, 96 N.C. App. 220, 221, 385 S.E.2d 510, 511 (1989) (\"1987 Workers\u2019 Compensation\u201d). \u201c[I]t is not our function to substitute our judgment for that of the Commissioner when the evidence is conflicting.\u201d 1987 Workers\u2019 Compensation, 96 N.C. App. at 221, 385 S.E.2d at 511. Instead, the Commissioner\u2019s order is presumed correct if it is supported by substantial evidence. G.S. \u00a7\u00a7 58-2-80 and 58-2-90(e) (2001). The order must conform to the guidelines set out in G.S. \u00a7 58-36-10:\n(1) Rates or loss costs shall not be excessive, inadequate or unfairly discriminatory.\n(2) Due consideration shall be given to actual loss and expense experience within this State for the most recent three-year period for which that information is available; to prospective loss and expense experience within this State; to the hazards of conflagration and catastrophe; to a reasonable margin for underwriting profit and to contingencies; to dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers; to investment income earned or realized by insurers from their unearned premium, loss, and loss expense reserve funds generated from business within this State; and to all other relevant factors within this State: Provided, however, that countrywide expense and loss experience and other countrywide data may be considered only where credible North Carolina experience or data is not available.\nG.S. \u00a7 58-36-10. As long as the Commissioner\u2019s order meets the criteria of G.S. \u00a7 58-36-10 and is supported by material and substantial evidence, the order should be upheld.\nI.\nThe Bureau first argues that the Commissioner improperly considered investment income from capital and surplus funds while calculating the ordered insurance rates. In order to analyze the Bureau\u2019s argument, we must first look at the structure of the insurance industry and the holdings of the 1994 Auto and 1996 Auto cases. See 1996 Auto, 350 N.C. 539, 516 S.E.2d 150 (1999); 1994 Auto, 124 N.C. App. 674, 478 S.E.2d 794 (1996).\nAn insurance company\u2019s total profit is derived from two distinct parts of the insurance business \u2014 (1) profit earned by the insurance operations and (2) profits earned by investing capital and surplus funds. The profit from insurance operations includes both the underwriting profit and investment income from policyholder-supplied funds. The underwriting profit can be defined as the difference between insurance premiums collected and the amount the company pays out for losses and expenses. Policyholder-supplied funds are the amount of premiums paid to the insurance company. Policyholder-supplied funds are usually invested during the insurance coverage period.\nThe investment income produced by policyholder-supplied funds should be given due consideration during the ratemaking process. See G.S. \u00a7 58-36-10(2). The underwriting profit portion has been the traditional focus of the dispute between the Commissioner and the Bureau. In past orders, the Commissioner improperly considered investment income from capital and surplus funds. See 1996 Auto, 350 N.C. 539, 516 S.E.2d 150 (1999); 1994 Auto, 124 N.C. App. 674, 478 S.E.2d 794 (1996).\nIn addition to the statutory structure, this Court and the Supreme Court have placed additional requirements upon the ratemaking process:\nThree basic principles of law pertain to the setting of insurance rates: (1) the Commissioner must set rates that will produce a fair and reasonable profit and no more; (2) what constitutes a fair and reasonable profit \u2018involves consideration of profits accepted by the investment market as reasonable in business ventures of comparable risk\u2019; and (3) the underwriting business, which includes the collection and investment of premiums, is the only basis for calculating the profit provisions.\n1996 Auto, 350 N.C. at 541, 516 S.E.2d at 151 (citations omitted) (quoting In re N.C. Fire Ins. Rating Bureau, 275 N.C. 15, 39, 165 S.E.2d 207, 224 (1965)). In the orders that gave rise to the 1994 Auto and 1996 Auto appeals, the Commissioner defined \u201cbusiness ventures of comparable risk\u201d as the total profit of the insurance industry. In order to set a rate equal to comparable businesses in those orders, the Commissioner subtracted capital investment income and investment income from policyholder-supplied funds from total returns to reach the underwriting profit:\nTotal profits of the industry\n- capital/surplus investment income\n= profits from insurance operations.\nProfits from insurance operations\n- income from policyholder-supplied funds\n= underwriting profit.\nBoth orders (1994 and 1996) were reversed because the Commissioner improperly considered the investment income on capital and surplus funds. See 1996 Auto, 350 N.C. at 545, 516 S.E. 2d at 153-54 (\u201cThis Court has made it clear that unless the legislature changes the law, investment income from capital and surplus cannot be considered when setting insurance rates.\u201d) and 1994 Auto, 124 N.C. App. at 686, 478 S.E.2d at 802 (\u201cThe formula used must exclude investment income earned on capital and surplus.\u201d). The Supreme Court prohibited the Commissioner from including capital and surplus income in the ratemaking formula because \u201c[i]n determining whether an insurer has made a reasonable profit, the amount of business done rather than its capital should be considered . . . .\u201d Comr. of Insurance v. Rate Bureau, 300 N.C. 381, 444, 269 S.E.2d 547, 586 (1980) (\u201c1977 Auto\u201d) (quoting 2 Ronald A. Anderson, Couch Cyclopedia of Insurance Law \u00a7 21:38 (2d ed. 1959)). Here, the Bureau argues that the Commissioner has committed the same error in his 2001 order as he did in the 1994 and 1996 orders. We disagree.\nIn the 2001 order, the Commissioner altered his ratemaking formula in one significant way. Rather than attempting to find a total return, the Commissioner set the return on insurance operations as his target. The Commissioner made the following pertinent findings of fact:\n150. The Bureau proposes a return on operations equivalent to a target total return. A target total return is an appropriate return for the whole of an insurance company taking into account investment income from capital and surplus.\n151. The Bureau\u2019s target total return is a range of 13.1% to 15.3% and is based upon the cost of capital with the addition of a .49% market to book conversion factor. [Expert witness] Appel indicates that the law in North Carolina allows for a return on operations in this range.\n152. The Bureau uses a cost of capital as a measure of the returns that other businesses of comparable risk can earn in the market. However, the returns that the cost of capital measures are the returns those other businesses earn from all sources of income. Thus, the cost of capital is a total return, which in the insurance industry includes consideration of income from capital and surplus.\n153. Department witnesses Cohn, Schwartz and D\u2019Arcy testify that the Bureau\u2019s total return includes investment income on capital and surplus by virtue of the cost of capital calculation, described more fully below.\n156. In other jurisdictions, setting the cost of capital as the target return is appropriate; however, other jurisdictions may consider all sources of income in calculating profit. In North Carolina, only one source of income, the insurance operations, may be considered, while the investment income from capital and surplus may not.\n159. Miller indicates that the law in North Carolina is unique in that insurers are allowed a return on operations which, in other States, would be equivalent to the return on operations plus the return on capital and surplus. Miller\u2019s statement, thus, substantiates the Department\u2019s claims that the Bureau\u2019s return includes consideration of investment income on capital and surplus.\n161. In addition to the Bureau\u2019s consideration of investment income from capital and surplus in setting the target return, the Bureau\u2019s target return is excessive. In calculating the total return as the target, the Bureau is setting the return for the insurance operations alone (which is a partial return) commensurate with the total returns of other businesses, including the insurance business. This is simply not \u201ccomparable\u201d as required by law.\n162. The lack of \u201ccomparability\u201d is evidenced by the Bureau\u2019s prospective range of returns of 13.1% to 15.3% compared to the average pre-tax historical returns on insurance operations during an eighteen year period of the countrywide property/ casualty industry of approximately 3.7% and the ten year average pre-tax returns in competitive rating states of 4.3% liability and 6.4% physical damage. This lack of \u201ccomparability\u201d is further evidenced by the resulting profit provisions of 9.5% and 14.0%, which are higher than several of the witnesses have ever encountered in any jurisdiction and certainly higher than the profit provisions recently utilized by the top ten writers in three neighboring states.\n163. In contrast to the Bureau, the Department witnesses calculate a return on operations taking into consideration only the income generated by the insurance activity.\n164. The Department witnesses\u2019 recommended returns are compared to the risk or operational returns (partial returns) of businesses of comparable risk.\n165. The returns which the Department witnesses propose range from pre-tax returns of 4.3% to 4.5% for liability and 3.5% to 6.4% for physical damage to post tax returns of 3.7% to 6.8% for liability and 4.3% to 6.8% for physical damage.\n166. The Department witnesses recommend a return on operations that is not a total return because North Carolina law requires that profit be set on the insurance operations only and that profit from the investment business not be considered. Furthermore, a return on operations that is not a total return provides the proper comparison to businesses of comparable risk.\n167. Unlike the Bureau, the Department witnesses did not recommend a target total return because: (1) a total return includes consideration of investment income from capital and surplus; (2) calculating a return for only one source of insurance industry income based upon the returns generated by all sources of income of other businesses does not constitute \u201ccomparable risk,\u201d as required by the law of this State.\n168. The evidence in this case is overwhelming that it is impossible to calculate a target total return without considering investment income on capital and surplus.\n169. In an attempt to circumvent the illegality of including investment income from capital and surplus in the calculation of the target rate of return, Bureau witness Appel states that the prohibition against considering investment income from capital and surplus applies only to the calculation of the profit provisions, not to the establishment of a target rate of return. However, there is absolutely no legal foundation for this contention and the recent North Carolina Supreme Court decision in the 1996 case states otherwise.\n170. Based upon the material and substantial evidence in this case, the Commissioner finds that the appropriate target rate of return in this case is a return on operations which is not equivalent to a total return. A total return requires consideration of investment income from capital and surplus which violates the ratemaking laws of this State. Furthermore, a total return makes an inappropriate comparison to businesses that are not of comparable risk, which leads to excessive returns. For those reasons, the Bureau\u2019s target range of returns is herein rejected.\n(Internal citations omitted.) In this order, the Commissioner focused on the return on insurance operations as the appropriate target for his calculations. In order to compare the insurance operations return to an industry of comparable risk, the Commissioner relied upon an expert opinion by Department witness Allan I. Schwartz. Schwartz testified that the eighteen year average return on insurance operations for the property and casualty insurance industry was 3.7%. Schwartz adjusted his estimate of the return on operations in order to account for the slight difference in risk between the property and casualty industry and the private passenger automobile insurance industry. The Bureau has not argued that this property and casualty industry information is not indicative of an industry of comparable risk. Indeed, we note that the Bureau\u2019s own expert, Dr. James H. Vander Weide, used property and casualty industry information when formulating his expert opinion. G.S. \u00a7 58-36-10(2) does not require the Commissioner or any expert witness to use only three years of North Carolina data when calculating the reasonable margin of underwriting profit. Those geographical and temporal restrictions only apply to the consideration of the loss and expense experience, which is not in dispute here. As a result, we hold that the evidence regarding the eighteen year average return on insurance operations is \u201cmore than a scintilla or a permissible inference\u201d that sufficiently supports the Commissioner\u2019s setting of rates.\nIn addition, we find the Bureau\u2019s argument that the Commissioner must set his target as the total rate of return to be unpersuasive. No statute or any case has required the Commissioner to focus on the total rate of return for the insurance industry. Instead, previous appellate court opinions have declared that the return on operations is the only portion of income the Commissioner can consider during the ratemaking process. If the Commissioner had compared total returns here, as he did in previous ratemaking orders, the Commissioner would have been required to add capital and surplus funds somehow. By using insurance operations as the comparable industry, the Commissioner did not need to consider investment income on capital and surplus funds. Accordingly, the investment income bn capital and surplus funds has not been used in the 2001 ratemaking calculation. The Commissioner\u2019s underwriting profit provision comports with the requirements of G.S. \u00a7 58-36-10 as well as the holdings of 1994 Auto and 1996 Auto. We conclude there is substantial evidence to support the Commissioner\u2019s findings of fact and conclusions of law on this issue. Therefore this assignment of error is denied.\nII.\nThe Bureau next argues that the Commissioner failed to give due consideration to the impact of policyholder dividends and rate deviations in his ratemaking calculations. We disagree.\nPolicyholder dividends are a return of premiums to insurance purchasers, much like a rebate. Policyholders pay premiums at the manual rate, then receive a rebate or \u201cdividend\u201d at the end of the policy term. See G.S. \u00a7 58-36-60 (2001). The manual rate is set by the Commissioner through the ratemaking process and is the rate insurance companies must charge customers unless a deviation is allowed. Rate deviations occur when a company receives permission to charge certain policyholders more or less than the manual rate. See G.S. \u00a7 58-36-30 (2001). If a policyholder is given a rate deviation, the policyholder pays less than the manual rate from the beginning of the policy period.\nThe Bureau contends that dividends and deviations are a necessary tool for competition among insurance companies. Without deviations or dividends, the Bureau argues that insurance companies could not attract \u201cgood risk\u201d policyholders. According to its argument, dividends and deviations are not profits. The Bureau believes that an adjustment of 5.0% should be included as a separate term in the ratemaking calculation in order to counteract the effect of dividends and deviations. Without this provision, the Bureau argues that a premium shortfall will occur. This argument is unpersuasive.\nDue consideration of policyholder dividends and rate deviations is required by statute. See G.S. \u00a7 58-36-10(2) (\u201cDue consideration shall be given ... to dividends, savings or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers.\u201d). The 1994 Auto, 1996 Auto-COA, and 1996 Auto cases are also instructive on this issue because the treatment of dividends and deviations was considered in those appeals.\nThe ratemaking formula is not required to contain an explicit adjustment for dividends and deviations in order to prove due consideration was given to them. See 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 154-55 (\u201c \u2018[D]ue consideration\u2019 does not require that a numerical adjustment of the rates be made in order to reflect the effects of dividends and deviations.\u201d); 1996 Auto-COA, 129 N.C. App. at 667, 501 S.E.2d at 686; 1994 Auto, 124 N.C. App. at 681, 478 S.E.2d at 799. It has also been held that dividends and deviations can be treated as profits rather than as expenses. 1996 Auto-COA, 129 N.C. App. at 668, 501 S.E.2d at 686 (citing 1994 Auto, 124 N.C. App. at 682, 478 S.E.2d at 800). The Bureau\u2019s arguments contradict these established guidelines and are therefore overruled.\nThe Commissioner made the following pertinent findings of fact regarding dividends and deviations:\n406. 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.\n407. Based on the foregoing, the Commissioner finds that an average manual rate with profit provisions of -2.8% for liability and +1.0% for physical damage will provide approximately 4.5% to 5.0% of manual premiums, or approximately $120-135 million, as savings that may be used to pay dividends and to grant deviations to insureds, assuming the same book of business.\n408. The approximately 4.5% to 5.0% of premium or approximately $120-135 million provided in the manual rate for policyholder dividends and deviations by the Bureau member companies is reasonable, adequate and is provided in the rates, which are adopted and approved herein by this Order and which are not inadequate, excessive, or unfairly discriminatory.\n409. Dividends and deviations in excess of the approximately 4.5% to 5.0% of premium or approximately $120-135 million may occur, as in the past. If so, the excess may come from companies which are prepared to accept, on an individual basis, less than the average profit provided in the manual rate, from accumulated surplus, from lower expenses, from an excessive rate level implemented by the Bureau or from sources which are not within the jurisdiction of the Commissioner.\n410. This approximately 4.5% to 5.0% of premium will become retained earnings, i.e., profit, if it is not distributed as dividends and deviations. Including more than the 4.5% to 5.0% of premium that comes from savings for dividends and deviations in the rate calculation will cause rates to spiral and become excessive and unfairly discriminatory.\nThe Commissioner also found that dividends and deviations are transfer payments or profit. The Commissioner found that including a specific provision for dividends and deviations was unnecessary because the use of an average rate implicitly included consideration of dividends and deviations. After careful review, we conclude that there is sufficient record evidence to support the Commissioner\u2019s findings.\nThe Commissioner\u2019s reasons for refusing to adjust the ratemak-ing formula by adding a provision for dividends and deviations are twofold. First he states that dividends and deviations should not be added to the rate because they are already included within the computation of the average rate. The average rate takes into account the companies that deviate as well as those that do not deviate.. Similarly, the average is already reduced by those companies that provide dividends. Any explicit provision would double-count dividends and deviations, which would lead to \u201cspiraling\u201d \u2014 a rise in insurance rates. In addition, the Commissioner finds that dividends and deviations are part of profit, instead of an expense for insurance companies. Since a provision for profit already exists, adding an additional provision in the ratemaking formula for these types of profit is redundant.\nWe hold that the Commissioner\u2019s findings of fact are based upon substantial and competent evidence. The Commissioner\u2019s findings of fact indicate that the insurance industry will have approximately 4.5% to 5.0% profit to use for dividends and deviations if they choose to do so. The Commissioner\u2019s finding that dividends and deviations are profit is based upon the opinion that these are monies voluntarily surrendered by the insurance companies. Treatment of dividends and deviations as profit has been approved by this Court before. See 1996 Auto-COA, 129 N.C. App. at 668, 501 S.E.2d at 686 (citing 1994 Auto, 124 N.C. App. at 682, 478 S.E.2d at 800). In addition, designating dividends and deviations as \u201cprofit\u201d and failure to adjust the ratemaking formula with a specific provision for them does not mean that the due consideration required by statute has been denied. Here, the Commissioner listed each expert witness\u2019s treatment of dividends and deviations in his findings of fact. The Commissioner then stated why he found one expert\u2019s opinion more persuasive than the others, and why he chose to treat dividends and deviations as he did. We note again that the Commissioner is not required to numerically adjust the rates to show that he has provided due consideration of any of the factors in G.S. \u00a7 58-36-10. See 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 154-55. Here, this technique of analysis indicates that the Commissioner provided due consideration to dividends and deviations as required by G.S. \u00a7 58-36-10.\nThe Bureau\u2019s arguments regarding competition and premium shortfalls are essentially arguments that dividends and deviations should not be treated as profit. We reject these arguments for the reasons stated above.\nThe Bureau also argues that the Commissioner\u2019s order should focus on the aggregate industry rather than the average company. The Bureau cites the following:\nThe statute contemplates that the rates shall be fixed with a view of the aggregate earnings and profits for the insurance business in the State. Each company may make as much money as it can. Some may make enormous profits, some may do a losing business, but the average profit, that is, the average profit on the aggregate business, must be reasonable.\n1977 Auto, 300 N.C. 381, 444-45, 269 S.E.2d 547, 586 (1980) (quoting Aetna Ins. Co. v. Hyde, 285 S.W. 65 (Mo. 1926), cert. dismissed, 275 U.S. 440, 72 L.Ed. 357 (1928)). Here, the Commissioner chose to analyze the issue of dividends and deviations from the standpoint of an \u201caverage\u201d insurance company. However, his conclusions and findings also discussed the effect of the average rate on the industry and the overall aggregate profit of the industry. Therefore, assuming that the 1977 Auto case requires the Commissioner to consider the effect of the average rate on the industry and the overall aggregate profit of the industry, he has done so according to the order.\nAfter careful review of the record, we hold that the Commissioner\u2019s findings and conclusions were adequately supported by the evidence and do not produce an excessive, inadequate or unfairly discriminatory rate. Accordingly, this assignment of error is overruled.\nIII.\nThe Bureau also contends that the Commissioner improperly calculated the investment income available from policyholder-supplied funds. The Commissioner found that rate deviations should not be included in the calculation of the investment of policyholder-supplied funds. The Commissioner also found that no reduction in investment income should be included to account for agents\u2019 balances and prepaid expenses. We conclude that sufficient evidence supports the Commissioner\u2019s findings and conclusions.\nAs the Commissioner stated in his findings, investment income is dependent upon three factors: (1) the amount of money invested, (2) the length of time the funds are invested, and (3) the rate of return. Here, the Bureau disputes the Commissioner\u2019s decision regarding the first two factors \u2014 the amount invested and the duration of the investment. The Bureau argues that rate deviations reduce the amount of premiums that insurance companies are able to invest. The Commissioner calculated the amount of money available for investment without reducing that amount to account for rate deviations. The Commissioner based his calculation upon the testimony of Department of Insurance\u2019s expert witness Schwartz. Also, the Commissioner considered deviations within his calculation of the underwriting profit provision. If rate deviations were also considered within the investment income from policyholder-supplied funds portion of the equation, deviations would be counted twice. This double-counting would produce an excessively high rate of return on insurance operations according to the Commissioner\u2019s ratemak-ing formula. Therefore we hold that the Commissioner\u2019s refusal to reduce investment income from policyholder-supplied funds in order to consider rate deviations is supported by material and substantial evidence.\nThe Bureau also faults the Commissioner\u2019s refusal to reduce the estimated investment income projection as a result of agents\u2019 balances and prepaid expenses. Agents\u2019 balances occur when insurance policyholders pay for their coverage in installment payments throughout the policy term. \u201cPrepaid expenses\u201d refers to the insurance companies\u2019 practice of paying expenses from their reserve funds before the policy premiums are paid by consumers. The Bureau argues that agents\u2019 balances and prepaid expenses negatively affect overall investment income. Both agents\u2019 balances and prepaid expenses reduce the amount of time policyholder-supplied funds are invested. The Commissioner based his calculations on the assumption that the insurance company would have the full manual rate premium over the entire coverage period. The Commissioner found that his treatment of agents\u2019 balances and prepaid expenses was consistent with the testimony of expert witnesses Cohn and Schwartz. In addition, the Commissioner stated that his calculations were consistent with the calculations used to set rates that were examined in the 1994 and 1996 Auto opinions.\nIn 1994 Auto, this Court wrote:\nSection F of the Commissioner\u2019s order examined the issue of investment income from unearned premium, loss, and loss expense reserve funds [or \u201cpolicyholder-supplied funds\u201d]. In this section, the Commissioner clearly defined the factors involved in considering investment income; selected a reasonable rate of return (7%) on investments; and carefully explained why he concluded the Bureau\u2019s amount of reserves subject to investment was incorrect.\n1994 Auto, 124 N.C. App. at 691, 478 S.E.2d at 805. Here, the Commissioner summarized the evidence given by the expert witnesses on both sides of the dispute. The Commissioner noted that two expert witnesses had adopted his treatment of agents\u2019 balances and prepaid expenses from the 1994 and 1996 Auto cases. Then the Commissioner summarized his method of calculating investment income on policyholder-supplied funds in the previous orders. After finding that the Bureau had not offered new evidence on this matter, the Commissioner found that his calculation in the 2001 order was identical to the one approved by this Court in the earlier filing. Adopting the reasoning of this Court in 1994 Auto, the Commissioner found that:\n433. The policy reason for disallowing deductions for agents\u2019 balances and prepaid expenses is that, unlike the customary consumer transactions, in an insurance transaction the policyholder must pay for the insurance benefit in advance of the service provided. This pre-payment of premiums allows the insurance companies to invest this unearned revenue for profit. For this reason, policyholders, should, in the ratemaking process, receive the full benefit of income that results from investing policyholder funds.\nAlso see 1994 Auto, 124 N.C. App. at 691, 478 S.E.2d at 805. The Commissioner also repeated this Court\u2019s finding that agents\u2019 balances and prepaid expenses were within the control of the individual insurance companies and should not impact the ratemaking process in a way that disadvantages consumers. We conclude that there is substantial evidence in the record to support the Commissioner\u2019s calculation of investment income from policyholder-supplied funds.\nIV.\nThe Bureau\u2019s final argument on appeal is that the Commissioner erred by substituting his ratemaking procedure without first finding that the Bureau\u2019s procedure would produce excessive, inadequate or unfairly discriminatory rates. We disagree.\nThe Bureau takes exception to the Commissioner\u2019s rejection of its data set. The Bureau\u2019s calculations were based upon one year of data that met certain reliability standards. The Bureau had used the one year data set in previous filings without objection from the Commissioner. However, here the Commissioner chose to use a three-year average data set instead. The Commissioner found that \u201c[t]he use of three years of data will produce rates that are neither inadequate, excessive or unfairly discriminatory.\u201d The Commissioner did not find that the Bureau\u2019s data would produce excessive, inadequate or unfairly discriminatory rates. The Bureau contends that without this specific finding regarding its data, the Commissioner could not substitute his own data set. This argument is not persuasive.\nG.S. \u00a7 58-36-10(1) states that \u201c[r]ates or loss costs shall not be excessive, inadequate or unfairly discriminatory.\u201d \u201cIf the Commissioner after the hearing finds that the filing does not comply with the provisions of this Article, he may issue an order disapproving the filing, determining in what respect the filing is improper, and specifying the appropriate rate level or levels that may be used . . . .\u201d G.S. \u00a7 58-36-70(d). These two statutes focus upon the propriety of the entire filing instead of specific parts of the filing. As a result, we hold that the Commissioner is not required to find each portion of the Bureau\u2019s filing improper before he can substitute his own ratemaking structure. Instead, the plain language of G.S. \u00a7 58-36-70(d) indicates that the Commissioner must analyze the entire rate filing to determine whether the overall calculation will result in excessive, inadequate or unfairly discriminatory insurance rates. Therefore, it was not necessary for the Commissioner to find that the data set used by the Bureau would produce a calculation that created rates that were excessive, inadequate or unfairly discriminatory. The Commisioner, in order to use his own data or calculations, or to set rates, must only conclude that the Bureau\u2019s filing as a whole would result in excessive, inadequate or unfairly discriminatory rates. Here, the Commissioner concluded:\nII. Inasmuch as the Bureau has failed to give due consideration to the factors set forth in Conclusions of Law, Part I, the Bureau\u2019s proposed rate level increase for private passenger cars of ten and six tenths percent (+10.6%) is excessive and unfairly discriminatory for the reasons set forth in Findings Part I through Part VI and elsewhere in this Order, which are incorporated herein by reference. Accordingly, the Bureau\u2019s request for a rate increase of ten and six tenths percent (+10.6%) is denied and the filing is disapproved.\nBecause the Commissioner\u2019s conclusion was adequately supported by material and substantial evidence, this assignment of error is overruled.\nV.\nAfter careful review of the record, we hold that the Commissioner\u2019s order establishes a rate level that is not inadequate, excessive or unfairly discriminatory. The Commissioner appropriately considered the factors outlined in G.S. \u00a7 58-36-10 and applied his discretion according to the limits of the 1994 Auto and 1996 Auto opinions. The Commissioner\u2019s findings of fact are supported by material and substantial evidence. For the foregoing reasons, the Commissioner\u2019s order setting automobile and motorcycle liability insurance rates is affirmed.\nAffirmed.\nJudge STEELMAN concurs.\nJudge TYSON dissents.",
        "type": "majority",
        "author": "EAGLES, Chief Judge."
      },
      {
        "text": "TYSON, Judge\ndissenting.\nI respectfully dissent from the majority\u2019s opinion.\nI.Issue\nThe issue before this court is whether the Commissioner\u2019s order is supported by material and substantial evidence where the expert witness, whose opinion the Commissioner relied upon to support his findings of fact, ignored and expressly excluded consideration of statutorily required factors.\nII.Standard of Review\nOn judicial review, this Court employs the \u201cwhole record test\u201d to determine whether material and substantial evidence supports the findings of fact and conclusions of law of the Commissioner. State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau (1996 Auto), 350 N.C. 539, 547, 516 S.E.2d 150, 155, reh\u2019g denied, 350 N.C. 852, 539 S.E.2d 11 (1999). \u201cThe whole record test requires the reviewing court to consider the record evidence supporting the Commissioner\u2019s order, to also consider the record evidence contradicting the Commissioner\u2019s findings, and to determine if the Commissioner\u2019s decision had a rational basis in the material and substantial evidence offered.\u201d State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau, 124 N.C. App. 674, 678, 478 S.E.2d 794, 797 (1996). The Commissioner\u2019s order, if supported by substantial and material evidence, is presumed to be correct and proper. 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 155. This Court should not substitute its judgment for that of the Commissioner\u2019s when the evidence is conflicting. Id. at 548, 516 S.E.2d at 155.\nThe record shows that the Commissioner\u2019s findings of fact fail to conform to these requirements and are not supported by substantial and material evidence in the whole record. The order failed to meet the requirements of N.C. Gen. Stat. \u00a7 58-36-10.\nIII.Reliance on Countrywide Loss and Expense Experience\nThe Bureau asserts in their first assignment of error, that the Commissioner relied on expert testimony that does not compare returns on insurance operations in North Carolina to industries of comparable risk in North Carolina. \u25a0\nN.C. Gen. Stat. \u00a7 58-36-10 (2001) requires:\n(2) Due consideration shall be given to actual loss and expense experience within this State for the most recent three-year period for which that information is available . . . Provided, however, that countrywide expense and loss experience and other countrywide data may be considered only where credible North Carolina experience or data is not available.\n(emphasis supplied).\nThe statute requires that the Commissioner \u201cshall\u201d consider North Carolina data over the most recent three-year period in making his findings of fact. N.C. Gen. Stat. \u00a7 58-36-10(2) (2001). The Commissioner may consider countrywide data \u201conly\u201d if he finds that the North Carolina data is not \u201ccredible\u201d or \u201cavailable.\u201d Id.\nWhen finding returns on insurance operations, the Commissioner primarily relied on the expert opinion of the department\u2019s witness Allan I. Schwartz (\u201cSchwartz\u201d). Schwartz testified that the eighteen year average return on countrywide insurance operations for the property and casualty insurance industry was 3.7%. He further testified that property/casualty risks are lower than the risks associated with automobile liability. Relying on this testimony, the Commissioner made the following finding of fact:\n162. The lack of \u201ccomparability\u201d is evidenced by the Bureau\u2019s prospective range of returns of 13.1% to 15.3% compared to the average pre-tax historical returns on insurance operations during an eighteen year period of the countrywide property/casualty industry of approximately 3.7% and the ten year average pre-tax returns in competitive rating states of 4.3% liability and 6.4% physical damage. This lack of \u201ccomparability\u201d is further evidenced by the resulting profit provisions of 9.5% and 14.0%, which are higher than several of the witnesses have ever encountered in any jurisdiction and certainly higher than the profit provisions recently utilized by the top ten writers in three neighboring states.\n(emphasis supplied). The Commissioner had previously and expressly found that the North Carolina data required to be considered by the statute was credible and available. The Commissioner made the following findings of fact:\n85. N.C. Gen. Stat. \u00a7 58-36-10 does require due consideration of the latest three years of data, that data is available in the filing for all three years and, according to the Bureau\u2019s credibility standards, all three years are fully credible. There doesn\u2019t appear to be any reason, therefore, for all three years not to be used. In fact, there appears to be a number of reasons why three years of data should be used in the rate calculations ....\n86. Therefore, based on the evidence in this case, the Commissioner finds that use of the three year unweighted average of the indications for the years 1997-1999 is the appropriate way to provide due consideration of the latest three years of experience for the bodily injury, property damage, medical payments, comprehensive and collision coverages. The use of three years of data will produce rates that are neither inadequate, excessive or unfairly discriminatory.\n(emphasis supplied).\nIn spite of these findings, the Commissioner relied on countrywide data from the property/casualty industry sector and data from neighboring states to set the overall return on operations at Schwartz\u2019s calculation of 3.7%. Schwartz admitted in his testimony that property and casualty risks were lower than automobile liability risks. Schwartz testified that \u201c[property and casualty insurance companies are better than average (lower risk) for beta, safety and price stability, and lower than average (higher risk) for earnings predictability. Overall, the property and casualty insurance industry is of about average or somewhat below average risk.\u201d\nThe Commissioner also considered data from the past eighteen years and failed to abide by the statutory time frame requiring data from the \u201cmost recent three-year period.\u201d N.C. Gen. Stat. \u00a7 58-36-10(2) (2001). By relying on countrywide data after finding that North Carolina data was \u201ccredible\u201d and \u201cavailable\u201d and by relying upon data six times older than the \u201cmost recent three year period,\u201d the Commissioner\u2019s findings of fact failed to comply with the statutory requirements and do not support his conclusions. Id.\nIV. Due Consideration of Dividends and Deviations\nA. Zero Percent Factor\nThe Bureau also contends the Commissioner did not give \u201cdue consideration\u201d to dividends and deviations.\nN.C. Gen. Stat. \u00a7 58-36-10 (2001) requires: \u201c(1) Rates or loss costs shall not be excessive, inadequate or unfairly discriminatory. (2) Due consideration shall be given ... to dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers . . . .\u201d (emphasis supplied). N.C. Gen. Stat. \u00a7 58-36-10(1) requires the Commissioner to determine whether the proposed rates will produce \u201ca fair and reasonable profit and no more.\u201d 1996 Auto, 350 N.C. at 542, 516 S.E.2d at 151.\nIn State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau, Judge Johnson found \u201c[t]he Commissioner . . . elected to assign a valuation of zero to dividends returned to policyholders and rate deviations.\u201d 102 N.C. App. 824, 404 S.E.2d 368, slip op. at 7 (May 7, 1991) (No. 9010INS864) (unpublished) (Judges, now Justices, Parker and Orr concurring); Rule 30(e)(3). This Court held:\n[t]he net result of the Commissioner\u2019s decision is that the calculated rates are completely unaffected by dividends and deviations. As we have carefully considered the Commissioner\u2019s findings of fact, calculations and conclusions of law, we are nonetheless unable to adopt his argument that by assigning zero values to both dividends and deviations, he has complied with existing case law.\nId. (citations omitted).\nAll evidence was presented to the Commissioner in the form of expert testimony. The Commissioner again relied on Schwartz\u2019s expert testimony. Schwartz testified that allowing dividends and deviations to be included as a factor in the rate decision, was against \u201cgood public policy\u201d and would result in unfairly discriminatory rates. Schwartz also testified that on \u201cpublic policy grounds ... it is not appropriate to build an additional cost factor for dividends and deviations back into the manual rate level\u201d and that \u201cdividends and deviations should not be built back into the manual rate level . . . since that procedure would eliminate any savings . . . . \u201d Relying on this testimony, the Commissioner\u2019s findings of fact applied a \u201czero percent factor\u201d for dividends and deviations in setting the insurance rates.\nPublic policy in North Carolina is and has been set by the North Carolina Legislature. N.C. Gen. Stat. \u00a7 58-36-10(2) (2001) requires \u201c[d]ue consideration shall be given ... to dividends, savings, or unabsorbed premium deposits allowed\u201d in setting rates. No specific number must be assigned to these factors. 1996 Auto, 350 N.C. at 547, 516 S.E.2d at 154-55. However, there must be substantial evidence in the record to show that dividends and deviations were given \u201cdue consideration.\u201d Id. In 1996 Auto, our Supreme Court found that the Commissioner\u2019s rates expressly included a 5% margin for dividends and deviations and held that substantial evidence supported the Commissioner\u2019s findings of fact regarding dividends and deviations. Id. at 548, 516 S.E.2d at 155. That case is distinguishable. Here, the Commissioner claims that he included a 4.5 to 5% margin as he did in 1996 Auto. However, unlike in 1996 Auto, nothing in the Commissioner\u2019s order shows that this 4.5 to 5% margin was expressly included in the rates. The order simply states that the 4.5 to 5% margin is \u201cimplicit\u201d in his calculations. In his dissent from the 1996 Auto case, Chief Justice Mitchell stated:\n[T]he Commissioner is required to give each factor some weight and that this must be reflected in his order. Otherwise, a reviewing court is faced with an inadequate appellate record and must, as here, simply accept the Commissioner\u2019s conclusory statements that he has taken all of the statutory factors into account. It is not enough for the Commissioner to note in conclusory fashion that dividends and deviations crossed his mind when he was entering his order.\nId. at 549, 516 S.E.2d at 156. The majority opinion states:\nThe weight to be given the respective factors is for the Commissioner to determine in the exercise of his sound discretion and expertise, but he may not arrive at his determination as to the propriety of the filing by shutting his eyes to experience shown by evidence of reasonably probative value. . . .\nId. at 547, 516 S.E.2d at 155, quoting State ex. rel. Comm\u2019r of Ins. v. N.C. Fire Ins. Rating Bureau, 292 N.C. 471, 488-89, 234 S.E.2d 720, 729-30 (1977). N.C. Gen. Stat. \u00a7 58-36-10(2) requires that the Commissioner \u201cshall\u201d give \u201cdue consideration\u201d to dividends and deviations, not \u201cimplicit\u201d inclusion.\nB. Classification of Dividends and Deviations\nIn their second assignment of error, the Bureau asserts error in the Commissioner\u2019s finding that dividends and deviations are \u201cprofits\u201d to the Bureau\u2019s member companies rather than costs.\nAs previously noted, \u201c[t]he whole record test requires the reviewing court to consider the record evidence supporting the Commissioner\u2019s order, to also consider the record evidence contradicting the Commissioner\u2019s findings, and to determine if the Commissioner\u2019s decision had a rational basis in the material and substantial evidence offered.\u201d State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau, 124 N.C. App. at 678, 478 S.E.2d at 797. The Commissioner relied on Schwartz\u2019s expert opinion and found that dividends and deviations were \u201cprofits\u201d instead of costs for the Bureau\u2019s member companies. The Commissioner concluded that since a provision for profit already existed, adding an additional provision in the ratemak-ing formula for these types of profit is redundant. The Commissioner based these findings on Schwartz\u2019s opinion that these dividends and deviations are a \u201cvoluntarily distribution based upon individual company management decisions.\u201d As Judge Johnson held in State ex rel. Comm\u2019r of Ins. v. N.C. Rate Bureau:\nIn addition, we are unprepared to adopt his finding that dividends and deviations are voluntary decisions of the member companies and cannot be guaranteed by the Rate Bureau or the Commissioner. To the extent that the Commissioner ignored dividends to policyholders and rate deviations in his calculations, the ordered underwriting profit provisions must be recalculated to reflect an adjustment for these rating criteria.\n102 N.C. App. 824, 404 S.E.2d 368, slip op. at 7 (May 7,1991) (citations omitted). The logic of that case applies equally here.\nThe Commissioner also found that including a specific provision for dividends and deviations was \u201cunnecessary\u201d because the use of an average rate \u201cimplicitly\u201d included consideration of dividends and deviations. The Commissioner\u2019s findings that dividends and deviations are profits and not costs to the Bureau\u2019s member companies has no basis in fact. Treating dividends and deviations as profits and assuming a zero percent factor forces the Bureau\u2019s member companies to either: (1) absorb these costs, which causes the rates to be \u201cinadequate,\u201d or (2) exclude higher risk policyholders who would otherwise qualify for the manual rate, which causes the rates to be \u201cdiscriminatory.\u201d N.C. Gen. Stat. \u00a7 58-36-10(1) (2001).\n1. Absorption of Costs bv Bureau\u2019s Member Companies\nThe Commissioner set his rate based upon the \u201caverage\u201d profit or return. The \u201caverage\u201d or midpoint return places an equal number of policyholders in the risk pool on either side of the average. Lower risk policyholders demand and receive discounts or deviations from the manual rate from the Bureau\u2019s member companies. Deviations are discounts from the manual rates and are never paid by the policyholders. 1996 Auto, 350 N.C. at 545, 516 S.E.2d at 154; see N.C. Gen. Stat. \u00a7 58-36-30 (2001). Dividends are, essentially, rebates returned to policyholders at the end of the policy period. Id.; see N.C. Gen. Stat. \u00a7 58-36-60 (2001). The reason the statute requires \u201cdue consideration\u201d of discounts and deviations in setting rates is that both reductions from the manual rate are tools the Bureau\u2019s member companies expend to attract and retain lower risk policyholders within the risk pool. Id. at 546, 516 S.E.2d at 154.\nRetention of lower risk policyholders in the risk pool is the basis for the legislature\u2019s policy choice that dividends and deviations be given \u201cdue consideration\u201d in setting rates. Without retention of lower risk policyholders in the risk pool, the relative risk of the pool to the insurer increases.\nExpressly excluding or ignoring the costs of dividends and deviations to a zero percent factor in setting the manual rate causes the average risk of the pool to shift higher, destroys the equilibrium required by the statute, and makes rates \u201cinadequate.\u201d N.C. Gen. Stat. \u00a7 58-36-10(1) (2001). Applying a zero percent factor excludes \u201cdue consideration\u201d of dividends and deviations, shifts the average risk, and causes the relative risk of the pool to be 4.5 to 5.0% higher, without providing the insurer offsetting compensation for the higher risk. To disallow insurers from treating dividends and deviations as costs requires the companies to absorb this cost and to subsidize rates for higher risk drivers. This forces the insurer to absorb these costs on a pool that is riskier than \u201caverage,\u201d and makes the rates \u201cinadequate.\u201d Id.\n2, Exclusion of Higher Risk Policyholders\nIf insurers are not allowed consideration for dividends and deviations, they may seek to exclude higher risk drivers from manual rates who would have otherwise qualified. If otherwise qualified drivers are excluded from manual rates, this \u201czero percent factor\u201d for dividends and deviations makes the rates \u201cdiscriminatory.\u201d Id. Using a zero percent factor for dividends and deviations causes the relative risk of the pool of policyholders to be higher than the average risk of the pool. Higher risk policyholders, who would have otherwise qualified for manual rates, may be excluded from manual rates and be assigned to the reinsurance facility in order to restore balance to the risk pool. In this situation, if dividends and deviations are not treated as costs, rates become \u201cdiscriminatory\u201d against excluded policyholders, who would have otherwise qualified for manual rates. Id. The statute\u2019s requirement of \u201cdue consideration\u201d to dividends and deviations reflects the General Assembly\u2019s public policy choice: (1) to provide affordable insurance coverage to the widest possible pool of drivers, at rates that are neither excessive, inadequate, or unfairly discriminatory and (2) to encourage efficient and economic practices for the purchase of liability insurance by all owners of vehicles operated on our highways. N.C. Gen. Stat. \u00a7 58.40-1 (2001); also see generally George A. Akerlof, The Market for \u201cLemons\u201d: Quality Uncertainty and the Market Mechanism, 84 Qu. J. Econ. 488, 488-90, 492-500 (1970) (2001 Nobel Laureate in Economics).\nV. Substantial Evidence to Support Findings of Fact\nJudicial reviews of other North Carolina Commissions\u2019 orders have held that findings of fact are not supported by substantial evidence when the expert opinion, upon which these findings were based, ignored legally required factors. Holley v. Acts, Inc., 357 N.C. 228, 581 S.E.2d 750 (2003); In re Corbett, 355 N.C. 181, 558 S.E.2d 82 (2002). Holley involved an appeal from the Industrial Commission granting a worker\u2019s compensation claim. Our Supreme Court held \u201cwhen such expert testimony is based merely upon speculation and conjecture, ... it is not sufficiently reliable to qualify as competent evidence . . . .\u201d 357 N.C. at 232, 581 S.E.2d at 753. Our Supreme Court reversed the Industrial Commission and held that the expert opinion evidence, upon which the Industrial Commission relied to make its findings, failed to meet the \u201creasonable degree of medical certainty\u201d standard required by law. Id. at 234, 581 S.E.2d at 754. Without expert testimony based upon legal requirements, no competent evidence supported the Industrial Commission\u2019s findings of fact. The Supreme Court reversed the Industrial Commission\u2019s decision. Id.\nIn re Corbett involved an appeal from the Property Tax Commission\u2019s order of value of real property. Our Supreme Court held that \u201cbased on statutory mandate, once it is determined that valuation or revaluation of a property is statutorily required, any valuation which is not made in accordance with the schedules, standards and rules used in the County\u2019s most recent general reappraisal or horizontal adjustment is in violation of the statutory requirements of section 105-287.\u201d 355 N.C. at 189, 558 S.E.2d at 87. Our Supreme Court stated \u201cif the provisions of [the statute] are triggered, it necessarily follows that the only statutorily permissible method of valuation is through the application of the County\u2019s schedules, standards and rules.\u201d Id. at 185, 558 S.E.2d at 84. Our Supreme Court reversed and remanded because the expert witness did not follow the statutory requirements in formulating his opinion. Id. at 189, 558 S.E.2d at 87.\nVI. Conclusion\nN.C. Gen. Stat. \u00a7 58-36-10 (2001) requires that the Commissioner\u2019s findings shall give \u201cdue consideration\u201d to \u201ccredible\u201d and \u201cavailable\u201d North Carolina data from the \u201cmost recent three year period\u201d and to dividends and deviations in setting rates. The Commissioner primarily relied on one expert\u2019s testimony, who not only ignored, but expressly excluded on \u201cpublic policy grounds,\u201d these statutorily required factors in formulating his opinion. This expert witness also based his opinion on eighteen year old countrywide data after the Commissioner had found North Carolina data from the most recent three year period to be \u201ccredible\u201d and \u201cavailable.\u201d Schwartz\u2019s opinion testimony failed to comply with the statute and fails to provide substantial evidence to support the Commissioner\u2019s findings of fact. I would reverse and remand this case to the Commissioner to base his order on substantial evidence that includes \u201cdue consideration\u201d to the General Assembly\u2019s statutory requirements. I respectfully dissent.",
        "type": "dissent",
        "author": "TYSON, Judge"
      }
    ],
    "attorneys": [
      "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 Department of Insurance, by Sherri L. Hubbard and Stewart L. Johnson, for appellee."
    ],
    "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, 2001 BY THE NORTH CAROLINA RATE BUREAU FOR REVISED AUTOMOBILE INSURANCE RATES-PRIVATE PASSENGER CARS AND MOTORCYCLES\nNo. COA02-891\n(Filed 7 October 2003)\n1. Insurance\u2014 ratemaking process \u2014 automobile and motorcycle liability insurance \u2014 investment income from capital and surplus funds \u2014 return on insurance operations\nThe Commissioner of Insurance did not improperly consider investment income from capital and surplus funds while calculating the ordered automobile and motorcycle liability insurance rates, because: (1) the Commissioner focused on the return on insurance operations as the appropriate target for his calculations; (2) the evidence regarding the eighteen year average return on insurance operations is more than a scintilla or a permissible inference that sufficiently supports the Commissioner\u2019s setting of rates; and (3) the Commissioner is not required to set his target as the total rate of return.\n2. Insurance\u2014 ratemaking process \u2014 automobile and motorcycle liability insurance \u2014 policyholder dividends \u2014 rate deviations\nThe Commissioner of Insurance did not fail to give due consideration to the impact of policyholder dividends and rate deviations in his ratemaking calculations for the ordered automobile and motorcycle liability insurance rates, because: (1) the rate-making formula is not required to contain an explicit adjustment for dividends and deviations in order to prove due consideration was given to them; (2) dividends and deviations should not be added to the rate since they are already included within the computation of the average rate; (3) dividends and deviations are part of profit and a provision for profit already exists; and (4) although the Commissioner analyzed this issue from the average insurance company, his conclusions and findings also discussed the effect of the average rate on the industry and the overall aggregate profit of the industry.\n3. Insurance\u2014 ratemaking process \u2014 automobile and motorcycle liability insurance \u2014 investment income from policyholder-supplied funds\nThe Commissioner of Insurance did not improperly calculate the investment income available from policyholder-supplied funds in its ratemaking calculations for the ordered automobile and motorcycle liability insurance rates, because: (l)if rate deviations were also considered within the investment income from policyholder-supplied funds portion of the equation, deviations would be counted twice; and (2) agents\u2019 balances and prepaid expenses were within the control of the individual insurance companies and should not impact the ratemaking process in a way that disadvantages consumers.\n4. Insurance\u2014 ratemaking process \u2014 automobile and motorcycle liability insurance \u2014 excessive, inadequate, or unfairly discriminatory rates\nThe Commissioner of Insurance did not err by substituting its ratemaking procedure without first finding that the North Carolina Rate Bureau\u2019s procedure would produce excessive, inadequate, or unfairly discriminatory automobile and motorcycle liability insurance rates, because: (1) the Commissioner is not required to find each portion of the Bureau\u2019s filing improper before he can substitute his own ratemaking structure; and (2) in order to use his own data or calculations or to set rates, the Commissioner must only conclude that the Bureau\u2019s filing as a whole would result in excessive, inadequate, or unfairly discriminatory rates.\nJudge Tyson dissenting.\nAppeal by North Carolina Rate Bureau from order entered 14 December 2001 by the North Carolina Commissioner of Insurance. Heard in the Court of Appeals 10 June 2003.\nYoung, Moore and Henderson, P.A., by R. Michael Strickland, William M. Trott, Marvin M. Spivey, Jr. and Terryn D. Owens, for appellant.\nNorth Carolina Department of Insurance, by Sherri L. Hubbard and Stewart L. Johnson, for appellee."
  },
  "file_name": "0416-01",
  "first_page_order": 446,
  "last_page_order": 473
}