In the Matter of a Filing made by the NORTH CAROLINA FIRE INSURANCE RATING BUREAU for a Review of Experience of Fire Insurance.
No. 525.Supreme Court of North Carolina.
January 21, 1969.*216 Atty. Gen., T. Wade Bruton and Asst. Atty. Gen., Bernard Harrell for North Carolina Insurance Commissioner.
Joyner & Howison, Raleigh, for North Carolina Fire Insurance Rating Bureau.
*217 LAKE, Justice.
Following the decision in United States v. Southeastern Underwriters Association, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440, the Legislature of this State enacted the statutes under which the premium rates upon fire insurance policies covering risks in this State are governed. These are found in Chapter 58, Article 13, of the General Statutes. They have not been amended in any respect material to the present inquiry since their enactment.
In only one case, In re North Carolina Fire Insurance Rating Bureau, 245 N.C. 444, 96 S.E.2d 344, have these statutes been before this Court. The decision in that case is not determinative of the questions involved in the present litigation. The carefully prepared briefs, both of counsel for the Bureau and of the Attorney General, advise us that counsel have found no decisions of other courts directly in point upon these questions and our own research has disclosed none. Certain fundamental principles of rate or price regulation, recognized and applied by this Court in decisions concerned with the regulation of public utility rates under Chapter 62 of the General Statutes, are applicable to this matter in a general way, but the statutory provisions governing the two rate making procedures are substantially different. Consequently, we are plowing new ground. If the process turns up a need for revision or supplementation of the existing statutes governing insurance premium regulation, a session of the Legislature is, fortunately, at hand.
The Pertinent Statutes
G.S. § 58-125 provides: "There is hereby created a bureau to be know as the `North Carolina Fire Insurance Rating Bureau.'"
G.S. § 58-126 provides: "The provisions of this article shall apply to insurance against loss to property located in this State, or to any valuable interest therein, by fire, * * *"
G.S. § 58-127 provides: "Under the supervision of the Commissioner of Insurance * * * insurance companies authorized to effect insurance in this State against the risk of loss by perils within the scope of this act, shall organize a rating bureau for the purpose of making rates and rules and regulations which affect or determine the price, which policyholders shall pay for insurance covered by this article, on property or risks located in this State; and all companies now or hereafter authorized to transact such business in this State shall become members of such bureau.
"The government of the rating bureau shall be vested in its members. * * *"
G.S. § 58-130 provides: "Every insurer shall file annually with the rating bureau * * * its underwriting experience in this State in accordance with classifications approved by the Commissioner. * * *"
G.S. § 58-131 provides: "The rating bureau in making rates shall not unfairly discriminate between risks involving essentially the same construction and hazards, and having substantially the same degree of protection."
G.S. § 58-131.1 provides: "No rating method, schedule, classification, underwriting rule, bylaw, or regulation shall become effective or be applied by the rating bureau until it shall have been first submitted to and approved by the Commissioner. * * *"
G.S. § 58-131.2 provides: "The Commissioner is hereby empowered to investigate at any time the necessity for a reduction or increase in rates. If upon such investigation it appears that the rates charged are producing a profit in excess of what is fair and reasonable, he shall order such reduction of rates as will produce a fair and reasonable profit only.
*218 "If upon such investigation it appears that the rates charged are inadequate and are not producing a profit which is fair and reasonable, he shall order such increase of rates as will produce a fair and reasonable profit.
"In determining the necessity for an adjustment of rates, the Commissioner shall give consideration to all reasonable and related factors, to the conflagration and catastrophe hazard, both within and without the State, to the past and prospective loss experience, including the loss trend at the time the investigation is being made, and in the case of fire insurance rates, to the experience of the fire insurance business during a period of not less than five years next preceding the year in which the review is made.
"Any reduction or increase of rates ordered by the Commissioner shall be applied by the rating bureau subject to his approval within sixty (60) days and shall become effective solely to such insurance as is written having an inception date on and after the date of such approval.
"Whenever the Commissioner finds, after notice and hearing, that the bureau's application of an approved rating method, schedule, classification, underwriting rule, bylaw or regulation is unwarranted, unreasonable, improper or unfairly discriminatory he shall order the bureau to revise or alter the application of such rating method, schedule, classification, underwriting rule, bylaw or regulation in the manner and to the extent set out in the order."
G.S. § 58-131.3 provides: "No insurer * * * shall knowingly issue or deliver or knowingly permit the issuance or delivery of any policy of insurance in this State which does not conform to the rates, rating plans, classifications, schedules, rules and standards made and filed by the rating bureau. * * *"
G.S. § 58-131.5 provides: "The Commissioner shall not make any rule, regulation or order under the provisions of this article without giving the rating bureau and insurers who may be affected thereby reasonable notice and a hearing if hearing is requested. * * *
"At the conclusion of such hearing, or within thirty (30) days thereafter, the Commissioner shall make such order or orders as he may deem necessary in accordance with his finding. Within thirty (30) days after receiving written notice of any such order or finding any person affected thereby may request a rehearing or review thereof before the Commissioner by filing a written request setting forth a summary of the reasons therefor. Upon receipt of such request, the Commissioner shall set a date for rehearing. Such application for rehearing shall act as a stay of the provisions of such order. The Commissioner may modify, change or rescind such order if he finds that the facts shown at the rehearing warrant such modification, change or recission. * * *"
G.S. § 58-131.8 provides: "A review of any order made by the Commissioner in accordance with the provisions of this article, shall be by appeal to the Superior Court of Wake County in accordance with the provisions of § 58-9.3."
G.S. § 58-9.3 provides: "(a) Any order or decision made, issued or executed by the Commissioner * * * shall be subject to review in the superior court of Wake County * * *
"(b) * * * The order or decision of the Commissioner if supported by substantial evidence shall be presumed to be correct and proper. * * *
"* * * The cause shall be heard by the trial judge as a civil case upon transcript of the record for review of findings of fact and errors of law only. * *
"(c) The trial judge shall have jurisdiction to affirm or to set aside the order or decision of the Commissioner and to restrain the enforcement thereof.
*219 "(d) Appeals from all final orders and judgments entered by the superior court in reviewing the orders and decisions of the Commissioner may be taken to the Supreme Court of North Carolina by any party to the action as in other civil cases. * * *"
G.S. § 58-176 prescribes the terms of the standard fire insurance policy to be issued in this State and, among other things, provides that such policy shall state: "[T]his Company * * * does insure [the policyholder] and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss * * *" not to exceed the amount specified in the policy.
It is readily apparent that this statutory plan contemplates a uniform premium rate schedule for all companies operating in the State. For rate making purposes, the Bureau is to be regarded as if it were the only insurance company operating in North Carolina and as if it had an earned premium experience, an incurred loss experience and an operating expense experience equivalent to the composite of those of the companies actually in operation. There is no presumption that a rate filing by the Bureau is correct and proper. In re North Carolina Fire Insurance Rating Bureau, supra. The burden is upon the Bureau to show that the rate schedule proposed by it is "fair and reasonable" and that it does not discriminate unfairly between risks. In re North Carolina Fire Insurance Rating Bureau, supra.
The Relevancy Of The Cost Trend Projection
In fixing by law the premium rate, it is the legislative power of the State which is being exercised. It is not only impractical to fix premium rates retroactively, it is expressly required by G.S. § 58-131.2 that premium rates fixed in accordance with the statutory plan be applied only to policies issued after the rates are so established. Consequently, the entire procedure contemplates a looking to the future.
The policy contracts fix in advance the premiums to be charged therefor by the issuing company. For the premiums so fixed at the inception of the policy, the company contracts that it will pay, within the maximum limit stated in the policy, the cost of replacing property destroyed by fire occurring in the then future. Thus, the amount which the company is obligated to pay is measured not by the cost of such replacement at the inception of the policy but by the cost of such replacement at the time of the fire. G.S. § 58-176. Consequently, the problem for the rate maker is to determine what amount, collected as premiums at the inception of the policies hereafter to be issued, will enable the company (1) to pay losses to be incurred during the life of such policies, at replacement costs prevailing at the time of such losses, (2) to pay other proper operating expenses of the company, and (3) to retain a "fair and reasonable profit."
Fire insurance is an economic necessity for owners of property. A policy issued by an insolvent company is no insurance at all, or virtually so. In the foregoing statutory plan, the State has undertaken to make available to its people the economic necessity of fire insurance policies, which actually insure, by authorizing the Bureau to propose premium rates just as would a single company having a monopoly of the fire insurance business in North Carolina. To protect the public against the danger of exorbitant rates for this economic necessity, which danger is inherent in monopolistic price fixing, the Legislature has vested in the Commissioner its own authority to withhold approval of such rates proposed by the Bureau and to fix rates which are fair and reasonable.
*220 [7, 8] It is beyond question that the Legislature may so delegate this authority to an administrative officer provided it prescribes sufficiently clear standards to control his discretion. See: Harrill v. Retirement System and Bird v. Retirement System, 271 N.C. 357, 156 S.E.2d 702; State ex rel. Utilities Comm. v. State and State ex rel. Utilities Comm. v. Southern Bell Telephone & Telegraph Co., 239 N.C. 333, 80 S.E.2d 133; Carolina-Virginia Coastal Highway v. Coastal Turnpike Authority, 237 N.C. 52, 74 S.E.2d 310. The statutory plan above set forth complies with that constitutional requirement.
Obviously, the Commissioner of Insurance has no authority to prescribe or regulate premium rates, except insofar as that authority has been conferred upon him by the above mentioned statutes. In exercising that authority he must comply with the statutory procedures and standards.
Specifically, G.S. § 58-131.2 directs him to fix premium rates such as "will produce a fair and reasonable profit" and no more. In reaching this end result, he is directed by that statute to "give consideration to all reasonable and related factors," including, but not limited to, the conflagration and catastrophe hazard, the past and prospective loss experience, the loss trend at the time of the investigation and the experience of the fire insurance business during a period of not less than five years next preceding the year in which the review is made.
It will be observed that the experience of the companies in the five calendar years next preceding the year of the investigation is not the sole factor to be considered by the Commissioner in fixing the rates for the future. He is also directed to consider the "prospective loss experience, including the loss trend at the time the investigation is being made." Admittedly, these terms are not as precise as might be desirable. It, nevertheless, seems clear that the "prospective loss experience" and the present "loss trend" relate, not only to the number of fires and to the extent of the physical destruction thereby, but also to the cost of replacement of the destroyed property.
A statute must be construed in the light of the purpose to be accomplished. In Re Dillingham, 257 N.C. 684, 127 S.E.2d 584; City of Greensboro v. Smith, 241 N.C. 363, 85 S.E.2d 292; Victory Cab Company v. City of Charlotte, 234 N.C. 572, 68 S.E.2d 433. Here, the purpose of the statute is to provide for the public, at reasonable cost, insurance in financially responsible companies. Not only fair play, but the accomplishment of this legislative purpose as well, requires that the premium be fixed at a level which will enable the insuring company (i. e., the entire insurance industry in this State treated as if it were one company) (1) to pay the losses which will be incurred during the life of the policies to be issued under such rates, (2) to pay other operating expenses, and (3) to retain a "fair and reasonable profit" and no more.
To accomplish this purpose the Commissioner must consider the losses, both in number and in cost, which will be incurred in the future; i. e., during the life of the policies issued under the rates fixed by him. Obviously, the determination of the cost of replacing losses to be incurred at price levels then to prevail is a matter of informed judgment and not of precise calculation. Such judgment can be formed only by consideration both of the past experience and of the present prevailing conditions. This is true both as to the number and physical extent of the losses to be anticipated and as to the cost of replacing such losses as they occur.
For this reason, the statute specifically directs the Commissioner to consider the experience of the fire insurance business during a period of not less than five years preceding the year of the investigation. He is not limited, however, to that experience, but may extend his consideration to the experience of still earlier *221 years, so long as such years are "reasonable and related" to an informed judgment as to the future. Evidence that present conditions are not those which prevailed during such former experience is, obviously, relevant to the translation of the past experience into an informed judgment concerning the future. For example, the past loss experience should be adjusted to take into account any newly discovered practicable procedures and devices for reducing the risk of fire. Similarly, recent events reliably indicating a rise, or a fall, in replacement costs previously experienced is a relevant circumstance in determining the extent to which past experience supplies a reliable guide to the future in the matter of replacement costs.
The use of past experience to estimate future needs involves, of necessity, a projection of known data into the unknown future. See: Los Angeles Gas & Electric Corporation v. Railroad Commission, 289 U.S. 287, 311, 53 S. Ct. 637, 77 L. Ed. 1180; McCardle v. Indianapolis Water Company, 272 U.S. 400, 408, 47 S. Ct. 144, 71 L. Ed. 316; Central Maine Power Company v. Public Utilities Commission, 153 Me. 228, 136 A.2d 726, 732-735. To bring past experience to the present level, by pro forma adjustments of premiums earned and losses incurred, and then to stop the adjusting process, is to project into the future the assumption that there will be no further change in the incidence of fires, in the extent of physical destruction thereby or in the cost of replacing the destroyed property. The question, therefore, is not whether a projection shall be made by the Commissioner, from the present into the future, for that is inevitable in the discharge of his statutory duty of fixing, for the future, a fair and reasonable premium rate. The question is as to the relevancy and trustworthiness of proposed evidence to and in the determination of the direction of such projection.
As the Court of Appeals stated, the Commissioner of Insurance "is a specialist in the field" and has been given by the Legislature the authority and the duty to set rates which will, in the future, produce a fair and reasonable profit and no more. His projection of past experience and present conditions into the future is presumed to be correct and proper if supported by substantial evidence, G.S. § 58-9.3, and if he has taken into account all of the relevant facts which he is directed by the statute to consider. G.S. § 58-131.2.
The expert opinion of a witness, however well informed, as to what things are proper for consideration by the Commissioner in making his projection is not determinative. That is a matter determined by the provisions of the statute. Thus, the presence in this record of testimony of the actuary for the Department of Insurance that, in his admittedly expert opinion, it would not be "conservative" or "proper" for the Commissioner, in fixing rates for the future, to consider a projection of the present and past cost trend does not afford a basis for calling into play the statutory presumption that the order of the Commissioner, resting upon the same conclusion, is correct and proper because "supported by substantial evidence." We hold that otherwise competent opinion evidence as to such projection is, as a matter of law, relevant to the determination by the Commissioner of the probable loss experience of the companies during the life of policies to be issued in the near future. Here, the Commissioner has expressly refused to consider the evidence at all.
Like the Court of Appeals, we cannot determine, and we have no authority to determine, whether the weighting process used by the Bureau in translating past experience into present conditions, plus the further adjustment of past experience to the present by applying to past costs inflation already experienced, leads, without more, to a correct projection of past experience and present conditions into that part of the future covered by policies hereafter to be issued. That question we do not *222 determine. What we do hold is that evidence, otherwise competent, of a cost trend, upward or downward, which continues from the past into the present, and expert testimony, otherwise competent, that such trend may reasonably be expected to continue into the future, so that future costs will be higher or lower than present costs, is evidence of "reasonable and related factors" which G.S. § 58-131.2 requires the Commissioner to consider in making his own projection into the future.
It is not a proper ground for the rejection of such evidence that such projection of an upward or downward cost trend into the future has never before been used in the rate making process. The statute does not contemplate that procedures and methods for determining replacement costs for the future shall be frozen. See: National Bureau of Casuality Underwriters v. Superintendent of Insurance, 6 A.D.2d 73, 174 N.Y.S.2d 836, 840.
In its holding that consideration of a prevailing cost trend, established by otherwise competent and credible evidence, is "a policy matter and should rest with the Commissioner," we think the Court of Appeals erred and to that extent its decision is hereby reversed. We conclude that the evidence offered by the Bureau as to the probability of a cost level on 30 June 1968 higher than that prevailing at the time of the filing, or at the time of the hearing before the Commissioner, was relevant and was improperly excluded by the Commissioner from his consideration. Its credibility and weight, as distinguished from its relevancy, are to be determined by the Commissioner. See: Insurance Department v. City of Philadelphia, 196 Pa. Super. 221, 173 A.2d 811; Long v. National Bureau of Casualty Underwriters, 209, Tenn. 435, 354 S.W.2d 255. It is not, necessarily, more speculative than is expert testimony as to pain, suffering and disability to be experienced in the future by an injured person.
The Exclusion Of Evidence At The Rehearing
Upon the filing, within the time allowed, of a written request for a rehearing, G.S. § 58-131.5 makes the holding of such rehearing mandatory. The statute clearly contemplates the introduction of relevant and otherwise competent evidence at such rehearing. The application for a rehearing, itself, automatically stays the former order of the Commissioner. We think it clear from the statute that, at such rehearing, evidence relevant to the issues involved in the original hearing and to the reasons stated in the petition for rehearing, if otherwise competent, is admissible.
The evidence offered by the Bureau at the rehearing consisted of data, the credibility of which is not questioned by the Department of Insurance or the Commissioner, and which, if true, tends to corroborate the Bureau's evidence at the original hearing with reference to cost levels likely to prevail during the life of policies to be issued in the near future. Having determined that like evidence was properly admitted at the original hearing by the Commissioner, and should have been taken into consideration by him in making his own projection for the future, it follows that the evidence offered at the rehearing was relevant and should have been admitted and considered.
We affirm the holding of the Court of Appeals that in sustaining the objection to this evidence at the rehearing the Commissioner was in error. Neither the Department of Insurance, any other protestant, nor the Bureau is confined to evidence relating to conditions prevailing at the date of the filing and to experience prior thereto. While the statute requires that a hearing by the Commissioner upon a filing by the Bureau be held promptly, it is well within the bounds of possibility that, between the filing and the hearing, experience may be had which would be most *223 relevant to the determination of the direction of a projection of the present "loss trend" into the future. Such change in conditions after the date of the filing might indicate a sharply downward trend in construction costs or in fire hazard. Surely, the statute does not contemplate that the Commissioner should shut his eyes to such a change in conditions after the date of the filing. It is equally clear that the Bureau may offer evidence of more recent experience which corroborates its allegations in the filing. The situation is somewhat analogous to testimony by a doctor as to the condition of a personal injury plaintiff observed in an examination conducted after the complaint was filed.
It is, of course, within the sound discretion of the Commissioner to require complex statistical exhibits to be made available to the adverse party prior to the hearing, to restrict or deny the use of newly developed statistical data sprung suddenly at the hearing by either party to the surprise of the other, and to grant such recess of the hearing as he may deem necessary to permit reasonable opportunity to study such data and to prepare evidence to refute it. That is not the situation presented in this record. Here, the Commissioner simply ruled, as a matter of law, that all evidence, however relevant, would be cut off as of the date of the filing. In this he did not follow the mandate of the statute.
Matters To Be Determined Upon The Remand To The Commissioner
We affirm the judgment of the Court of Appeals remanding the cause for further proceedings before the Commissioner. Those proceedings are to be conducted in accordance with this opinion. Their purpose will be to fix premium rates in accordance with the statutory plan. Since such further proceedings are to be had, we deem it advisable to discuss briefly questions which will necessarily arise therein.
When In Re North Carolina Fire Insurance Rating Bureau, supra, was decided by this Court, it was noted, "The question as to whether a 50% loss ratio is a proper division of a premium dollar is not before us for decision." Neither is that question before us upon this appeal, for this record does not indicate that it has been determined by the Commissioner. It will be before him, however, upon the remand hearing and must be determined by him.
G.S. § 58-131.2 imposes upon the Commissioner the duty of fixing such rates as will produce "a fair and reasonable profit" and no more. In the statutory plan for the regulation of insurance premium rates, there is nothing comparable to the procedure prescribed by G.S. § 62-133 for the fixing of rates by public utility companies for their services. The statutes conferring authority upon the Commissioner of Insurance, and directing his use of it, do not use the term "fair return on fair value" of the property devoted to the insurance business in North Carolina. Here, the direction is to prescribe rates which will yield a "reasonable profit." See, Insurance Department v. City of Philadelphia, supra.
There are, however, certain underlying principles common to both price fixing processes. Neither a "fair return on fair value" nor a "reasonable profit" can be determined until there is first a determination of reasonable expenses attributable to the business operated in this State. See, National Bureau of Casualty Underwriters v. Superintendent of Insurance, supra. This figure may or may not coincide precisely with the actual expenses paid. Obviously, the operating companies must be given substantial freedom of management, including the incurring of operating expenses such as salaries, but, like public utility companies, their determination of the propriety of expenditures for operating costs is not binding upon the Commissioner in a rate making procedure. This is true both of Loss Adjustment Expense *224 and of other operating expenses. The determination of a fair and reasonable allowance for Loss Adjustment Expense and for other operating expenses, like the determination of a fair and reasonable allowance for losses, involves a projection of past experience into the immediate future.
This determination having been made, it remains to be determined whether the difference between gross revenues to be derived from existing premium rates, Earned Premiums, less the combination of losses and expenses is a "fair and reasonable profit." This is not a question of law, nor is it a question upon which the determination of the Bureau is conclusive. It is a question of fact to be determined by the Commissioner upon evidence. As to this, as well as to the other factors in the equation, the burden of proof is upon the Bureau to show that the existing premium rates are not sufficient.
There is nothing sacrosanct about 6% in this connection. Whether six cents out of each dollar of gross revenue, i. e., Earned Premiums, is a fair and reasonable profit, an excessive profit or an insufficient profit must be determined by the Commissioner from evidence and this, too, involves a projection into the future of past experience and present conditions. It involves consideration of profits accepted by the investment market as reasonable in business ventures of comparable risk.
Like construction costs and consumer prices, a "fair and reasonable profit" varies from time to time. There is nothing in this record to show that the Commissioner has ever determined what percentage of Earned Premiums constitutes a fair reasonable profit for a fire insurance company. If upon the remand hearing of the present matter such finding in a former case be shown, it would not be res judicata and would not replace a finding of fact upon the question in the current investigation.
The ultimate question to be determined by the Commissioner is whether an increase in premium rates is necessary in order to yield a "fair and reasonable profit" in the immediate future (i. e., treating the Bureau as if it were an operating company whose experience in the past is the composite of the experiences of all of the operating companies), and, if so, how much increase is required for that purpose. This cannot be determined without specific findings of fact, upon substantial evidence, as to (1) the reasonably anticipated loss experience during the life of the policies to be issued in the near future, (2) the reasonably anticipated operating expenses in the same period, and (3) the percent of Earned Premiums which will constitute a "fair and reasonable profit" in that period. See, National Bureau of Casualty Underwriters v. Superintendent of Insurance, supra.
Although neither of the orders of the Commissioner so states, the Attorney General, in his brief filed on behalf of the Commissioner in this Court, appears to take the position that the Commissioner must approve or disapprove a filing by the Bureau in its entirety. We find nothing in the statutory plan for fixing premium rates which leads to this conclusion. See, National Bureau of Casualty Underwriters v. Superintendent of Insurance, supra. Unquestionably, the Bureau may amend its filing so as to propose a smaller increase in premium rates than that proposed in the original filing, but, in the absence of such amendment, the Commissioner, upon proper findings of fact supported by substantial evidence, may fix premium rates at a level such as to allow part but not all of the increase proposed by the Bureau, just as the Utilities Commission may do in the case of rate proposals filed with it. See, State ex rel. Utilities Commission v. Lee Telephone Co., 263 N.C. 702, 140 S.E.2d 319, in which Denny, C. J., speaking for the Court, said: "[T]here is nothing in the statutes that requires the Commission to accept the rate or rates proposed, or to reject *225 them altogether." Judicial review of such an order may be had in accordance with the statute "by any person aggrieved." G.S. § 58-9.3.
The orders of the Commissioner of Insurance are hereby vacated. This matter is remanded to the Court of Appeals for the entry by it of an appropriate judgment for a further remand to the Superior Court of Wake County and thence to the Commissioner of Insurance for further proceedings in accordance with this opinion.
Modified and affirmed.