Workshop on Florida’s Excessive Profit Rule Includes Review of Reporting and Calculation Methods

Pursuant to an administrative proceeding brought by FFVA Mutual Insurance Company (“FFVA”), the Florida Office of Insurance Regulation (“OIR”) held a public Rule Development Workshop today, February 22, 2010, on Rule 690-189.007, F.A.C. relating to Insurer Experience Reporting-Excessive Profits, Workers’ Compensation Insurance. 

In its administrative proceeding, FFVA had challenged the OIR’s use of internal policies on what expenses were allowed to be claimed by workers’ compensation insurers for excessive profits reporting purposes.  In its action, FFVA also alleged that the OIR was engaging in unpromulgated rulemaking.  Further administrative proceedings relating to this case have been stayed, pending Rule development.

The purpose of today’s Workshop was to review the existing Rule and provide a forum for the OIR to obtain comments on possible changes to it. OIR Attorney Christopher Meadows officiated the meeting.

During testimony, an FFVA representative noted that the Rule does not adequately explain or define how an insurer’s expenses would be treated for purposes of the excessive profits reporting and calculation, and that there needs to be guidance on what types of expenses are deductible and which are not. 

It was presented that there has not been any debate on these issues and that accountants and actuaries should engage in a meaningful discussion on expense deduction.  The FFVA representative also indicated that discovery taken during the aforementioned administrative proceeding demonstrated that OIR has taken an internal ad hoc position on what types of expenses are allowable.    

In its presentation, FFVA emphasized that the industry deserves an explanation of when certain expenses are, or are not included in excessive profits calculations.  It also was suggested that, in instances where the OIR adjusts the numbers reported by the insurer on its excessive reporting form, the OIR should provide an explanation concerning the reasons and basis for the adjustment.

OIR Attorney Jeffrey Joseph asked the FFVA representative whether the company had any specific suggestions or language that would benefit the rulemaking process.  The FFVA representative explained that the company had intended to have a consultant present at the Workshop to provide related technical testimony, but that this individual was unavailable due to travel difficulties. 

Nonetheless, the FFVA representative indicated that areas of concern in relation to the Rule, such as investment and related administrative expenses, interest on insurer obligations and federal income tax treatment, were all examples of opportunities where further refinement and transparency was needed.  Further, it was contended that issues relating to allocation of expenses for multi-state insurers needed to be addressed uniformly, as opposed to on an ad hoc basis.

In response to the FFVA testimony, and at the request of the OIR, National Council on Compensation Insurance (“NCCI”) Chief Economist Harry Shuford commented on NCCI federal income tax and investment policies as they relate to excessive profit calculations.  During his testimony, Mr. Shuford noted that federal income taxes are addressed by NCCI as part of its internal rate of return (“IRR”) model, as well as its profit factor calculation.  Mr. Shuford explained that, because the excessive profits calculation was an “after-tax” computation, it would not be appropriate to deduct federal income taxes on the excessive profits reporting form. 

Mr. Shuford also testified on the applicability of investment income and expenses to Rule 690-189.007.  He noted that, according to NCCI calculations, the profit factor would increase from 11 percent to 20 percent without the inclusion of investment income in the IRR model, because the cost of capital would be determined strictly from underwriting gains or losses.   

OIR Actuary James Watford noted that no suggestion is being made that investment income should be included as part of the excessive profits calculation.  He queried whether it was appropriate to allow investment expenses to be deducted if investment income was not included.  Mr. Shuford responded that, since investment expenses are factored into the NCCI model, they should be a permissible deduction.   

The record will remain open until March 5, 2010 to allow interested parties an opportunity to provide written comments.

Should you have any questions or comments, please contact Colodny Fass.

To unsubscribe from this newsletter, please send an email to sgray@cftlaw.com.