In the fall of 1991, I was a freshman attending my first college class. It was an introduction to accounting course and the professor was the chair of the accounting department. The first thing I recall him saying to the impressionable youth assembled before him that morning was “the answer to every question is ‘it depends’”. That was 33 years ago and the people with whom I work today can tell you that I repeat his words almost daily. I’ve been reviewing or managing the regulatory review of property & casualty insurance product filings in some capacity for almost 22 years. About the only thing I am certain of is that nothing is certain. Almost everything is a judgment call. When I’m struggling to decide whether we should approve or challenge a proposed rate, I am sometimes asked “is it supported?” But actuarial science is only math-based opinion, utilizing assumptions on which professionals in the field often disagree. Similarly, when struggling on matters involving policy language or rating rules, I might be asked “does it comply with law?” If there was certainty in written law, then there would be far fewer lawyers and perhaps no judges at all.
The lack of certainty makes it very challenging to train new employees on how to review insurance product filings. We recently held a three-day in-person training session for our actuarial staff and the words “it depends” were displayed on the room’s white board throughout. I wish I could give everyone a rubric that tells them exactly what to approve and not approve. But I cannot because everything is nuanced; everything depends on the specific circumstances. We instead need to ensure our employees have the knowledge and judgment necessary to make the many difficult decisions required of them every day.
Insurers are likewise challenged by the lack of certainty. Insurers want more guidance from regulators, and they would ideally like to see that guidance in writing. But when practically everything depends on the specific circumstances and context, and everything can be appealed, the opportunities for written guidance are limited. Insurers express frustration at times when we challenge something in their filing, and they believe we did not do so in another insurer’s filing. While that can happen undeliberately (we are human, after all), it most often occurs deliberately due to the specific circumstances involved.
As one example, the leveraged effect of inflation is a phenomenon on which we have been challenging insurers the past few years. It means that policies with high limits are impacted more than policies with low limits in a high inflationary environment. Pennsylvania has some of the lowest minimum auto insurance requirements in the nation. Minimum limits electors disproportionately live in the Philadelphia region where auto insurance rates are generally higher than other areas of the state. We pay special attention to the insurance rates charged to consumers least able to afford insurance. If we receive a filing that proposes to increase auto insurance rates in reaction to high severity trend, and the insurer did not consider the leveraged effect of inflation, then we are probably going to challenge them on it. But if the severity trend in the filing is not significant, then the leveraged effect of inflation is unlikely to be an issue, and we probably won’t send any questions about it. It depends.
We also adapt our review of product filings to the size and sophistication of the insurance companies submitting them. The amount of data and level of detail needed to perform complex actuarial analysis can be substantial. A small monoline domestic mutual insurance company typically won’t have as much credible data as a large national or multi-national insurance company. Their systems might not be able to produce the information they do have at the same level of detail as a larger insurance company. They are likely going to use reinsurance, and rely on reinsurers, to a much greater degree. We adjust our reviews of their filings accordingly. In lieu of submitting our standard requests for additional data, we may instead schedule a conference call with a smaller insurer to learn what information they have and try to work with what they can provide. We handle many of our special data calls and studies in a similar manner, querying only larger insurers that we know can provide the data at the level of detail needed in a timely manner.
There are a multitude of other considerations that go into the review of each product filing, not the least of which is policyholder disruption. Our Property & Casualty Actuarial Supervisor once said, in response to someone asking why a filing with a small overall rate impact was still in review, “the overall rate level change tells you very little about a filing”. I have also borrowed and used this truism in the years since. Insurers call with some frequency to ask why their “revenue neutral” rate filings are not yet approved. But every policyholder might see their rate change in a filing with an overall rate level impact of 0.00%. A filing that includes changes to the class plan is almost always going to require more time to review than a filing for base rate changes only, even if the former has a lower overall rate change. There’s more to review and the impact on individual policyholders will be a key part of that review.
Because policyholder disruption is such an important consideration, I want to also speak to the issue of overlapping rate changes. By “overlapping,” I mean policyholders being impacted by more than one filed rate change at renewal. A filing that takes effect twelve months after the last rate change is much different than one that takes effect only eleven months after the last rate change, even if the filings are otherwise identical. In the latter case, some policyholders are going to feel the impacts of two different filings when they next renew. We’re going to want to know about those impacts. We might even ask the insurer to consider delaying the effective date of the second filing by a month to eliminate the overlap. Or we might not if the combined impacts aren’t overly disruptive. And, of course, that’s going to be influenced by the extent of the class plan changes in the filings.
We want to engage more with industry and improve the product filing review process. We recently held our first ever quarterly meeting with property and casualty insurance companies. A little over 150 people attended. We presented on nine topics, including our plans to promulgate a regulation regarding the rating on unknown risk classifications. Our next quarterly meeting will be in mid-January and insurers can email me directly at mmckenney@pa.gov to be added to the invitation list. Having to deal with common, repeated issues on a filing by individual filing basis is one of our biggest challenges, and these quarterly meetings will allow for dialogue between the Insurance Department and industry on many of the most significant issues. It must be dialogue, though, because most issues are nuanced and the exact circumstances and context matters. Written guidance is unfortunately not often possible because… it depends.
Michael McKenney is the Director of the Bureau of Property and Casualty Insurance in the Office of Insurance Product Regulation at the Pennsylvania Insurance Department. He has worked at the Insurance Department for almost 22 years and oversees the Department’s evaluation of approximately 11,000 product filings each year. An active participant with the National Association of Insurance Commissioners (“NAIC”), Michael is a member of the Workers Compensation Task Force, the Title Insurance Task Force, Surplus Lines Task Force and is a former chair of the Casualty Actuarial and Statistical Task Force. As a member of the Pet Insurance Working Group, he helped draft the NAIC’s Pet Insurance Model Law, which Pennsylvania recently enacted as Act 19 of 2024. He was also one of the drafters of the multi-state homeowners’ insurance “Market Intelligence” data call. He has published articles in the Insurance Regulatory Examiners Society’s “The Regulator” and the Society of Actuaries’ “General Insurance Insights” newsletters. He resides in Mechanicsburg, PA with his wife of 25 years and their three children and can be found seven Saturdays a year in Beaver Stadium cheering on the Penn State football team. We Are!