Insurers Can’t Rely on Outside Gauge on Rates

Companies selling commercial liability insurance in California will have to set rates, starting Jan. 1, without relying on prices recommended by an industry group, the state Department of Insurance said Monday.

Insurance Commissioner Roxani M. Gillespie said she has approved a plan under which the New York group, Insurance Services Office, will continue to provide data on average losses and expenses to its member companies but without recommending prices.

“We found that insurers tended to use outdated ISO rates, deviate from them during a soft market and revert to the full advisory rate during the peak of a hard market,” Gillespie said. (A “hard” market is characterized by a shortage of some lines of insurance and relatively high prices, a soft market by rampant price competition such as occurred in the early 1980s.)

“This zigzag behavior resulted in horrendous price increases and had adverse repercussions on the insurers as well,” Gillespie said.

ISO Data Not Questioned

The change “will certainly encourage companies to take a finer look at their own expenses in calculating rates,” said David E. Ostwald, the office’s vice president for corporate communications. Previously, ISO reported not only loss data but calculated “advisory” prices that included a 5% profit margin and other factors.

Milo W. Pearson, chief of the state’s rate-administration bureau in Los Angeles, said the department routinely examines the records every three years of each of the nearly 300 companies writing commercial liability insurance in the state.

Pearson said the department has had no quarrel with the quality of the data ISO provided its members and regulators. “It’s the application by the companies, once they get the rate, that we’re really questioning here--particularly in the area of expense,” he said.

Many insurers would simply accept the average expense data without analyzing their own actual experience, he explained.