Cal. Code Regs. Tit. 10, § 2644.25 - Reinsurance
(a) For all lines
and sublines except for those listed in the next subparagraph, ratemaking shall
be on a direct basis, with no consideration for the cost or benefits of
reinsurance.
(b) For earthquake and
for medical malpractice facultative reinsurance with attachment points above
one million dollars, the maximum permitted earned premium is calculated as
follows:
The sum of
(1) the
quotient of
(A) the difference of
(i) the product of
a. the projected losses, as defined in
section 2644.4, plus the projected defense
and cost containment expense, as defined in section
2644.8, minus the projected
reinsurance recoverables, as defined in section
2644.26,
b. multiplied by 1 minus the fixed investment
income factor, as defined in section
2644.19(a),
(ii) minus the projected ancillary income, as
defined in section
2644.13,
(2) plus the quotient of
(A) the reinsurance premium, net of ceding
and contingent commissions,
(B)
divided by the difference of
(i)
1.0,
(ii) minus the variable
expense factor, as defined in section
2644.14.
Stated as a formula:
Max permitted EP= | (losses + DCCE - recoverables) x (1- fixed invest income factor) - ancil inc. | + | reins premium |
1 - eff std - profit factor + var invest inc factor | 1-var exp factor |
(c) For the calculation of fixed investment
income factor, the numerator and denominator of the loss reserves ratio shall
be adjusted for projected reinsurance recoverables, and for the variable
investment income factor, the numerator and denominator of the unearned premium
reserve ratio shall be adjusted to reflect the cash flows of the unearned
reinsurance premium.
(d)
Reinsurance costs shall be allowed for ratemaking purposes as set forth in this
section only if:
(1) the reinsurance
agreement was entered into in good faith in an arms-length transaction and at
fair market value for the coverage provided, and
(e) There will be no allowance for
reinsurance between affiliated entities as set forth in Schedule Y of the
Annual Statement.
(f) Copies of the
reinsurance agreements shall be submitted with the filing.
(g) For the purposes of this section and
section 2644.26, reinsurance shall include
other risk financing mechanisms, such as catastrophe bonds.
(h) For the earthquake line, if at least 30%
of the requested rate results from the cost of reinsurance, and a consumer or
the consumer's representative requests a hearing within 45 days of public
notice, the Commissioner shall hold a hearing on the issue of the
reasonableness of the reinsurance costs, as defined in section (d), and whether
some or all of those costs shall be reflected in the proposed rate change. An
insurer's rate application shall indicate whether at least 30% of the requested
rate results from the cost of reinsurance.
(i) For the medical malpractice line, if at
least 30% of the requested rate is attributable to the cost of facultative
reinsurance with attachment points above one million dollars, and a consumer or
a consumer's representative requests a hearing within 45 days of public notice,
the Commissioner shall hold a hearing on the issue of the reasonableness of the
reinsurance costs, as defined in section (d), and whether some or all of those
costs shall be reflected in the proposed rate change. An insurer's rate
application shall indicate whether at least 30% of the requested rate results
from the cost of reinsurance.
Notes
2. 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).
3. Change without regulatory effect amending subsections (h) and (i) 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. 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).
3. Change without regulatory effect amending subsections (h) and (i) 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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