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August 14, 2018

California Department of Insurance Requires Underwriting Rules to be Made Public

By John F. Finston, Dan R. Brown, Theresa M. Fitzgerald, H. Michael Byrne and Daniel P. McCarty

The California Department of Insurance (CDI) issued a legal opinion (“Opinion”) on August 10 requiring underwriting rules included in property and casualty (P&C) rate applications to be made public, even if such rules contain confidential and/or proprietary information. The Opinion, which we understand was issued to avert consumer litigation against the CDI, could have far-reaching effects on the P&C market in California and beyond, particularly for InsurTech innovation.

Summary of the Opinion

The Opinion defines an “underwriting rule” as “any rule or factor used by an insurer in the process of examining, accepting, or rejecting insurance risks, and classifying those risks selected in order to charge the proper premium for each” and to include eligibility guidelines. The Opinion reasons that underwriting rules are subject to public inspection because (i) California law requires all information provided to the Commissioner to be made available for public inspection, and (ii) underwriting rules are provided to CDI to “evaluate the reasonableness of a proposed rate in relation to the specific risks to be insured and coverages to be offered.”

If an insurer fails to submit its underwriting rules with each rate application when requested by CDI, or submits such rules as confidential and not subject to public disclosure, the Opinion finds that the application would “not include and make available for public inspection all information required by the Commissioner to evaluate fully the requested rate change” and that the public “would be improperly denied the full statutorily guaranteed…period to analyze a complete rate application.” Accordingly, the CDI could deem such an application “incomplete,” meaning that the required public notice period would not be triggered and the application would not move forward.

Significant Policy Shift

The Opinion resolves the question of whether underwriting rules are subject to public record requests, whether made by consumers or competitors. Apparently, the CDI has been struggling with this issue for some time, and the Opinion marks a considerable shift in CDI policy. The CDI previously treated P&C underwriting rules as confidential provided they were marked “confidential,” “proprietary” or “trade secret” unless and until a request for such information was made. This had remained the CDI’s position even after Proposition 103 was enacted in 1988.

Citing the benefits of transparency to consumers and insurers alike, a CDI press release announcing the Opinion states that the “public has a right to know how insurers choose who is eligible for coverage” and the Opinion will provide the transparency necessary to “let consumers know if they’re being treated fairly by their insurers.”

Commercial Impact - InsurTech

The Opinion’s potential effect on insurers and the California P&C market overall could be significant, especially for the continued growth of InsurTech. The decision could discourage the launch of some new types of rating models and products in California if the CDI will not protect the intellectual property of insurers and/or their innovation partners. It also remains to be seen whether the CDI’s rationale in the Opinion—e.g., providing transparency necessary to determine “fair” treatment—could have wider implications.

In addition, consumer groups can cite the Opinion in their ongoing attempts to persuade state insurance regulators in other states (and the NAIC) to require public disclosure of underwriting rules and other information supporting rate applications such as “Big Data.” Other states now might find those arguments more persuasive.

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We welcome any questions and feedback. Please feel to contact any of the authors or your usual Drinker Biddle contact.

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