Commissioner of Insurance v. North Carolina Rate Bureau, No. COA 15-402, 2016 N.C. App. LEXIS 822 (N.C. Ct of App. Aug. 2, 2016).

A North Carolina state appellate court was asked to rule on a challenge to homeowners’ insurance rate determination that included the allocation of reinsurance costs for catastrophic losses. The state rating bureau filed for new homeowners’ rates and included a provision for the net cost of catastrophe reinsurance because of the proximity of the state to the coast. North Carolina law allows for property insurance rates to include a provision to reflect the cost of reinsurance to protect against catastrophic exposure within the state. The Insurance Commissioner rejected the rate filing and a hearing was held with expert testimony.

There were multiple issues, but on the reinsurance issue the focus was on whether the Commissioner erred in determining the net cost of reinsurance to be included in the rates.

The rating bureau’s filing included a provision for the net cost of reinsurance at 17.5% of premium based on an analysis performed by its expert. The Insurance Department’s witnesses determined that the rating bureau’s model was overstated and not reflective of the reinsurance market in North Carolina. The Commissioner rejected the rating bureau’s net cost provision and ordered a net cost of 10% of premium. The Commissioner’s determination included an explanation why the rating bureau’s methodology was rejected, including that the expert, an economist, had no discernible background in reinsurance.

In upholding the Commissioner’s determination, the court held that the Commissioner did not abuse his discretion in discrediting the rating bureau’s expert and his analysis. The court noted that the Commissioner directly addressed the methodology and made a record with findings that supported the Commissioner’s decision. The court noted that the Commissioner had addressed the so-called real world evidence that the rating bureau presented and had rejected it because the data included quota share reinsurance or non-catastrophe reinsurance in almost all of the years considered. The court held that the Commissioner did not abuse his discretion in disregarding that evidence.

Finally, the court held that the Commissioner’s selection of 10% was not arbitrary based on the evidence presented by the Insurance Department’s witnesses. Court held that the Insurance Department witness was competent to testify given that he was an actuarial consultant with a professional designation as an Associate in Reinsurance. The court upheld the Commissioner’s determination of the reinsurance provision as based on a reasoned analysis with a rational basis in the evidence and that it was from the middle range developed by the actuary.