Cal. Code Regs. tit. 10 § 2644.23

Current through Register 2024 Notice Reg. No. 45, November 8, 2024

Section 2644.23 - Credibility Adjustment

(a) To the extent that the maximum and minimum permitted earned premiums are based upon data that lack credibility, a credibility adjustment shall be made.

(b) For each form for homeowners multiple peril and for each coverage for private passenger auto liability and physical damage the standard for full credibility shall be 3000 claims. Partial credibility shall be the square root of the ratio of the actual number of incurred claims in the experience period divided by the full credibility standard. For lines of business other than homeowners multiple peril and private passenger automobile liability and physical damage, the standard for full and partial credibility shall be determined using the most actuarially sound method.

(c) When the loss and defense and cost containment expense data is less than fully credible, in the maximum and minimum premium formulas in sections 2644.2 and 2644.3, the following shall be substituted:

(1) The sum of

(A) the credibility weight, as defined in section 2644.23(b),

(B) multiplied by the sum of

(i) projected loss, as defined in section 2644.4,

(ii) plus projected defense and cost containment expense, as defined in section 2644.8,

(2) plus

(A) the difference of

(i) 1.0

(ii) minus the credibility weight, as defined in section 2644.23(b),

(B) multiplied by the complementary loss and defense cost containment expense, as defined in section 2644.23(d).

Stated as a formula:

Credibility weight x (loss + DCCE) + (1- credibility weight) x comp loss DCCE

(d) The complementary loss and defense and cost containment expense means

(1) the quotient of

(A) the sum of

(i) the trended current rate level premium, as defined in section 2644.24,

(ii) multiplied by 1.0 plus the complement trend, as defined in section 2644.23(g),

(iii) multiplied by the maximum denominator, as defined in section 2644.2(c).

(B) plus

(i) the ancillary income, as defined in section 2644.13

(2) divided by 1 minus the fixed investment income factor, as defined in section 2644.19.

Stated as a formula:

Comp loss DCCE = (TCRLP x (1 + comp trend) x max denom + ancil income) /(1 - fixed invest inc factor)

(e) Where the cost of reinsurance is allowed, as provided in section 2644.25, the credibility adjustment in subsection (c) shall be made to loss plus defense and cost containment expense minus reinsurance recoverable, as defined in section 2644.26.

(f) Where the cost of reinsurance is allowed, as provided in section 2644.25, the complementary loss and defense and cost containment expense means

(1) The quotient of

(A) The sum of

(i) the trended current rate level premium, as defined in section 2644.24,

(ii) multiplied by 1.0 plus the complement trend, as defined in section 2644.23(g),

(iii) Multiplied by the maximum denominator, as defined in section 2644.2(c).

(B) plus the ancillary income, as defined in section 2644.13,

(C) Minus the product of

(I) the reinsurance premium, as used in section 2644.25, divided by 1 minus the variable expense factor, as defined in section 2644.14,

(Ii) multiplied by the maximum denominator, as defined in section 2644.2(c),

(2) Divided by 1 minus the fixed investment income factor, as defined in section 2644.19.

Stated as a formula:

Comp loss DCCE = (TCRLP x (1 + comp trend) x max demon + ancil income - reins perm / (1 - vary exp factor) x max demon)/ (1 - fixed invest Inc factor)

(g) The complement trend means the annual net trend plus one, raised to the power of the number of years from the effective date of the current rate to the proposed effective date of the proposed rates, minus one.

Stated as a formula:

Comp trend = ((annual net trend+1)^number of years) -1

If the number of years from the effective date of the current rate to the proposed effective date of the proposed rates exceeds four, the complement trend shall be the annual net trend plus one, raised to the fourth power, minus one.

(h) The annual net trend is the ratio of the loss trend, as defined in section 2644.7, annualized, plus one, divided by the premium trend, as defined in section 2644.7, annualized, plus one, minus one.

Stated as a formula:

Annual net trend = ((annual loss trend +1)/(annual premium trend +1))-1

(i) If the credibility weight is less than 25% the applicant or the Commissioner may use an alternative complementary loss and defense and cost containment expense, provided that the alternative is the most actuarially sound method.

Cal. Code Regs. Tit. 10, § 2644.23

1. New section filed 8-13-91 as an emergency; operative 8-13-91 (Register 92, No. 3). A Certificate of Compliance must be transmitted to OAL 12-11-91 or emergency language will be repealed by operation of law on the following day.
2. Repealed by operation of Government Code section 11346.1(g) (Register 92, No. 15).
3. New section refiled 2-14-92 as an emergency; operative 2-14-92 (Register 92, No. 15). A Certificate of Compliance must be transmittted to OAL 6-15-92 or emergency language will be repealed by operation of law on the following day.
4. Repealed by operation of Government Code section 11346.1(g) and new section filed 3-15-95; operative 3-15-95. Submitted to OAL for printing only pursuant to Government Code section 11343(a)(1) (Register 95, No. 11).
5. Amendment of subsection (a), repealer and new subsections (b) and (c) and new subsections (c)(1)-(g) filed 1-3-2007; operative 4-3-2007. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g) (Register 2007, No. 1).
6. Amendment filed 5-16-2008; operative 5-16-2008. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g) (Register 2008, No. 20).

Note: Authority cited: Sections 1861.01 and 1861.05, Insurance Code; and 20th Century v. Garamendi, 8 Cal.4th 216 (1994). Reference: Sections 1861.01 and 1861.05, Insurance Code; and Calfarm Insurance Company v. Deukmejian (1989) 48 Cal.3d 805.