Cal. Code Regs. Tit. 10, § 2644.12 - Efficiency Standard
(a)
The Commissioner shall calculate the efficiency standard annually, within 45
days of the publication of the necessary source data, which shall be expressed
as a maximum allowable ratio of historic underwriting expenses, including
adjusting and other expenses, to historic earned premiums, which represents the
fixed and variable cost for a reasonably efficient insurer to provide insurance
and to render good service to its customers.
(b) The efficiency standard shall be set
separately for each insurance line, and separately for insurers distributing
through independent agents and brokers, through exclusive agents, and through
employees of the insurer selling insurance on a direct basis. For an insurer
using more than one distribution system, the efficiency standard shall consist
of an average weighted by earned premium for each distribution system. In
setting the efficiency standard, the Commissioner shall determine whether, in
the long-term, efficiency will be enhanced and premiums lowered by adopting a
separate standard for insurers writing large and small amounts of insurance in
the line. If the Commissioner determines that such separate standards would
have such long-term effects, the Commissioner shall set the standard separately
according to the amount of insurance being written in the line, pursuant to
section 2646.3. In lines where the number
of insurers employing a given distribution system is, in the judgment of the
Commissioner, inadequate for the calculation of a mean that provides a useful
efficiency standard, the Commissioner shall adopt a single efficiency standard
for that line, pursuant to section
2646.3, which shall apply to all
insurers writing in that line regardless of distribution system. For lines of
business that combine personal and commercial exposures, the commissioner may
set separate efficiency standards, pursuant to section
2646.3.
(c) The efficiency standard shall be
calculated as the arithmetic average of the latest three years for which data
are available.
(d) For farmowners,
the efficiency standard for captive insurers shall be the average for all
distribution systems combined.
(e)
For earthquake, the efficiency standard shall exclude adjusting and other
expenses. Adjusting and other expenses shall be added to defense and cost
containment expenses.
(f) For
burglary and theft, all distribution systems shall be combined, and a five-year
average shall be used.
(g) In each
category, the efficiency standard shall be set at the weighted mean (weighted
by earned premium in California) expense ratio of insurers in that category. In
calculating the average, the Commissioner may exclude insurers for which
reliable data are not readily available.
(h) All data shall be taken from the National
Association of Insurance Commissioners database of the statutory annual
statement state page and of the Insurance Expense Exhibit, Part III.
(i) A company's data shall be included in the
calculation only if
(1) The company is
licensed in California;
(2) The
company's California direct earned premium is greater than zero;
(3) The company's countrywide direct earned
premium is greater than zero;
(4)
The company's countrywide direct losses incurred is greater than zero;
and
(5) The company's ratio of
underwriting expenses, including adjusting and other expenses, to earned
premium is greater than zero and less than 65%.
(j) If a company's commission expense is less
than zero, the negative amount shall be set to zero.
(k) If a company's California allocated other
acquisition expense is less than zero, the negative amount shall be set to
zero.
(l) If a company's California
allocated general expense is less than zero, the negative amount shall be set
to zero.
(m) If a company's tax,
licenses and fees expense is less than zero, the negative amount shall be set
to zero.
(n) Countrywide expenses
for general and other acquisition expenses shall be allocated to California on
the basis of direct earned premium. Countrywide expenses for adjusting and
other expenses shall be allocated to California on the basis of direct incurred
losses.
Notes
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. Repealer of subsections (a)-(a)(3)(D), subsection relettering, amendment of newly designated subsections (a), (b) and (d) and new subsections (c) and (e)-(k) 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. New subsections (d)-(f), subsection relettering and amendment of newly designated subsection (n) 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).
7. Change without regulatory effect amending subsection (b) filed 7-14-2021 pursuant to section 100, title 1, California Code of Regulations (Register 2021, No. 29). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20.
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.
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. Repealer of subsections (a)-(a)(3)(D), subsection relettering, amendment of newly designated subsections (a), (b) and (d) and new subsections (c) and (e)-(k) 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. New subsections (d)-(f), subsection relettering and amendment of newly designated subsection (n) 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).
7. Change without regulatory effect amending subsection (b) filed 7-14-2021 pursuant to section 100, title 1, California Code of Regulations (Register 2021, No. 29). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20.
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