THERESE M. GOLDSMITH MARTIN Commissioner Governor KAREN STAKEM HORNIG ANTHONY G. BROWN Deputy Commissioner Lt. Governor mm} MARYLAND SA DRA GNA INSURANCE Property and Casualty ADMINISTRATION 200 St. Paul Place, Suite 2700, Baltimore, Maryland 21202 Direct Dial: 410-468-2310 Fax: 410-468-2306 Email: gcabin@mdinsurance.state.md.us 1-800-492-6116 TTY: 1-800-735-2258 May 21, 2014 Meghan Mulvihill Counsel Allstate Insurance Company 2775 Sanders Road, Suite A2-W IL 60062 Re: Allstate Indemnity Company Rate Filing - SERFF Dear Ms. Mulvihill: The Maryland Insurance Administration has reviewed the rate ?ling for private passenger motor vehicle insurance by Allstate Indemnity Company (?Allstate?) under SERFF number ALSE-129270805. Under the rate ?ling, Allstate has proposed an overall rate increase of 3% for its private passenger motor vehicle insurance program. Allstate also has proposed to revise itsearly signing discount, add new territories, and update base rates and rate adjustment factors. Responsible Payer Discount Allstate?s ?ling includes a responsible payer discount. Under Allstate?s rating rules, all private passenger motor vehicle polices initially qualify for the discount. At renewal, each policy is evaluated to determine whether it continues to qualify for the discount. If a cancelation notice for nonpayment of premium due on the policy was sent during the most recent 12-month period, the discount will be removed. Otherwise the discount will continue to apply. With respect to private passenger motor vehicle insurance, of the Insurance Article prohibits an insurer from increasing a renewal premium based on the credit history of an insured. Section of the Insurance Article de?nes ?credit history? as ?any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer?s creditworthiness, credit standing, or credit capacity that is used or expected to be used, or collected in whole or in part, for the purpose of determining perSonal lines insurance premiums or eligibility for coverage.? As a general rule, information that a business collects on its own customers for internal use falls outside of the de?nition ?credit history? because the information is not obtained from a consumer reporting agency. See COMAR 3 . 15.1 An exception is created by COMAR however, which includes the following de?nition of ?consumer reporting agency?: ?Consumer reporting agency? includes an insurer and any affiliate of an insurer that collects information that: Bears on a consumer?s credit worthiness, credit standing, or credit capacity; and Is used or expected to be used wholly or partly to serve as a factor in establishing the consumer?s eligibility or pricing for personal lines of property and casualty insurance to be used primarily for personal, family, or household purposes. As a result of this definition, credit-related information that an insurer collects about its own customers for rating purposes is considered information from a consumer reporting agency and falls within the de?nition of ?credit history.? This would include an individual?s payment history, which bears on the individual?s creditworthiness and is the type of information that typically is included in a credit report. For the reasons stated above, we ?nd that Allstate?s use of use of cancellation notices to remove a discount at renewal constitutes using credit history to increase a renewal premium in violation of 0f the Insurance Article. Complementary Group Rating With this ?ling, Allstate is adding a ?Complementary Group Rating? factor to its rating system. Under Complementary Group Rating, a policy is assigned to a ?micro-segment? based on the following four variables: (1) The birth date (month/day/year) of the oldest operator on the policy; (2) The number of years with prior carrier; (3) Territory; and (4) The gender of the oldest operator on the policy. These four variables yield 191 million unique combinations. As a result, there are 191 million micro-segments. Each micro-segment is assigned to a ?Complementary Group? based on the following considerations: (1) Expected loss costs; (2) Policyholder disruption; and (3) Marketplace considerations and competitive position. There are 901 Complementary Groups and each Complementary Group is assigned a rating factor. That rating factor is applied as the last step in calculating a premium before adding the ?xed expense premium. Loss Model In assigning micro-segments to a Complementary Group, Allstate uses a loss model to predict expected loss costs. Among other things, the loss model considers the following variable: claims in the last 0 36 months?. Section of the Insurance Article provides that an insurer that issues a policy that contains PIP coverage ?may not increase the premium on the policy due to a claim or payment made under that coverage?. We ?nd that Allstate?s use of PIP claims as a rating variable violates of the Insurance Article. Given that the loss model uses a rating variable that violates the law, any results produced by the model also violate the law and may not be used in rating a policy. Retention Model In assigning micro?segments to a Complementary Group, Allstate also uses a retention model. The retention model consists of: (1) a midterm defection model, which is used to determine the probability of a policyholder defecting during the policy term; and (2) a renewal model, which is used to determine the probability of a policyholder renewing after receiving a renewal letter. Among other things, the retention model considers the following variable: ?full hit.? The full hit variable indicates whether a credit inquiry returns information on each operator covered by the quote. Under of the Insurance Article, an insurer is authorized to use only the credit history of ?an applicant? to rate a new policy of private passenger motor vehicle insurance. An insurer is not authorized to use the credit history of any other operator on a policy. See MIA Bulletin 02?14. In addition, of the Insurance Article prohibits an insurer from using the absence of credit history or the inability to determine credit history as a factor in rating a policy. We ?nd that Allstate?s use of the full hit rating variable violates ?27? of the Insurance Article by using credit history of operators other than the applicant to rate a policy of private passenger motor vehicle insurance. We also ?nd that Allstate?s use of the full hit variable violates of the Insurance Article by using the absence of credit history or the inability to determine credit history as a factor in rating a policy. The retention model also considers the following variable: ?insurance score?. Allstate already uses insurance scores earlier in the rating process. As the sixth step in calculating a premium, each policy is placed in an insurance score tier based on combination of the applicable insurance . score and a determination of whether the applicant or policyholder had continuous prior 7 coverage. Policies are then assigned insurance score tier factors, which range from 0.63 to 1.39. Under of the Insurance Article, an insurer that uses credit history to rate a policy of private passenger motor vehicle insurance may provide a discount of up to 40% or impose a surcharge of up to 40%. Allstate has exhausted the entire 40% limit on discounts and surcharges by use of the insurance score tier factors. Given this, we find that further modification of a premium by using an insurance score as a variable in the retention model violates the 40% limit on discounts and surcharges based on credit history under of the Insurance Article. Given that the retention model uses variables that violate the law, any results produced by the model also violate the law and may not be used in rating a policy. With respect to the retention model, we also asked Allstate to respond to the following questions: 0 Could two policyholders who otherwise have identical risk characteristics be rated differently if the model determines that one of the policyholders has a different probability than the other policyholder of defecting during the policy period or accepting a renewal offer? a Does the model evaluate the responsiveness of policyholders to price change? 0 If so, would a policyholder who is determined to be less responsive to price change be rated differently from a policyholder who is determined to be more responsive to price change? Allstate?s response included the following statements: The new Complementary Group Rating (CGR) structure provides additional segmentation to our existing rating plan. Under this new CGR structure, policyholders are assigned to micro?segments, which are then assigned to the Complementary Group that best re?ects the micro-segment?s expected loss cost under the new loss model while limiting large rate swings, lessening disruption, and ultimately reducing the adverse impact on retention of implementing the new loss model directly. In nearly all cases, any rate movement of a micro?segment from its current rate will be in the direction of that micro-segment?s indicated rate under the new loss model. The extent to which a micro-segment moves toward indicated premium is in?uenced by the retention model, which evaluates the micro-segment?s responsiveness to price change. If micro-segments have identical indicated premiums, but either different current premiums and/or retention model predictions, they may receive different Complementary Group assignments. Translated into plain English, this means that two policyholders who have identical risk characteristics can, in fact, be rated differently if the retention model determines that one of the policyholders has a different probability than the other policyholder of defecting during the policy period or accepting a renewal offer. Section of the Insurance Article states that insurer may not make or allow unfair discrimination between insureds or properties having like insuring or risk characteristics in. . .the premium or rates charged for insurance?. For purposesof the Insurance Article, the Court of Appeals has de?ned unfair discrimination as ?discrimination among insureds of the same class based on something other than actuarial risk.? Insuranc? Commissioner v. Engleman, 345 Md. 402, 413 (1997). By using the retention model, Allstate is discriminating between insureds with like insuring or risk characteristics based on the probability that the insureds will defect midterm or fail to renew, rather than based on a difference in actuarial risk. This constitutes a violation of of the Insurance Article. In its response to the questions, Allstate argued that use of the retention model is consistent with current ratemaking practices. Allstate noted that it is a common practice for an insurer to take a rate increase that is less than the indicated rate based on business considerations such as retaining business and competing with other companies. Allstate?s response included the following statements: Please note that the assignment of Complementary Groups is similar to current accepted ratemaking practices. It is a common practice to select rating factors for a particular rating step that are different than the ?fully indicated? levels in order to balance a number of necessary business considerations, including but not limited to, loss cost estimates, customer disruption, and competitor rates. Responding to an updated set of indicated rating factors by moving only partially toward indicated factors has been used frequently in the past to mitigate impacts to customer premiums and competitive position. Our preferred method simply applies a consistent and more rigorous approach to these considerations and applies them at a more granular level than prior rate making processes have made possible. In addition, the Statement of Principles Regarding Property and Casualty Insurance Ratemaking states ?Ratemaking is the process of establishing rates used in insurance and other risk transfer mechanisms. This process involves a number of considerations including marketing goals, competition and legal restrictions to the extent they affect the estimation of future costs associated with the transfer of risk.? The Statement concludes ?The actuary, by applying the ratemaking principles in this Statement, will derive an estimation of the future costs associated with the transfer of risk. Other business considerations are also a part of ratemaking.? Allstate is correct in stating that insurers often take a rate increase that is less than the indicated rate based on business considerations such as retaining policyholders and competing with other companies. While insurers may take a rate increase that is less than the indicated rate, they may not do so in a manner that violates the law. As Allstate acknowledged in its response to the questions, the ratemaking process is subject to ?legal restrictions.? Under Complementary Group Rating, Allstate is failing to limit rate increases in a manner that treats all insureds with like insuring or risk characteristics equally. Instead, Allstate is varying rate increases for insuredswith like insuring or risk characteristics based on the probability that the insureds will defect midterm or fail to renew. For example, the CGR Individual Rate Assignment Table contains the following: Rating Gender Birth Years Current Indicated Selected Underlying Proposed Underlying Selected Complementary Territory of Date of with Premium Premium Premium Rating Fixed Rating Group Group Oldest Oldest Prior Plan Expense Plan Factor Operator Operator Carrier Proposed and Proposed Premium Other Total Premium Premium 1207 6/17/1957 5+ 2,815.49 3,746.86 3,376.65 2,421.78 176.77 2,598.55 1.32 QFZ 706 3/27/1950 5+ 2,476.21 3,746.45 2,965.48 2,803.85 119.47 2,923.32 1.02 YNG In the above example, there is a difference of only 41 cents in the indicated rates for the two risks. In spite of the indication that the rates for the two risks should be nearly identical, one risk has been assigned a selected rate that is $411.17 greater than the selected rate for the other risk and a rating factor is that 0.30 greater than the rating factor for the other risk. We ?nd that this method of rating results in unfair discrimination between insureds with like insuring or risk characteristics in the premium or rates charged for insurance in violation of of the Insurance Article. In its response to the MlA?s questions, Allstate also noted that any rate movement of micro- segments is in the direction of the indicated rate. Allstate?s response included the following statement: Since in nearly all cases, any rate movement of a micro-segment from its current rate will be in the direction of that micro-segment?s indicated rate under the new loss model, we believe that the proposed rates resulting from a CGR analysis are appropriate. While it is true that in most cases the rates for micro-segments are moving toward the indicated rate, they are doing so in a very unequal manner. For example, the CGR Individual Rate Assignment Table contains the following: Rating Gender Birth Years Current Indicated Selected Underlying Proposed Underlying Selected Complementary Territory of Date of with Premium Premium Premium Rating Fixed. Rating Group Group Oldest Oldest Prior Plan Expense Plan Factor Operator Operator Carrier Proposed and Proposed Premium Other Total . Premium Premium 601 1/28/1949 5+ 757.87 605.44 755.67 640.34 175.98 816.32 0.91 D7G 601 1" 3/16/1949 5+ 2,133.72 2,585.07 2,558.76 1,793.16 224.57 2,017.73 1.3 EN6 In the case of the second risk listed above, the indicated premium exceeds the current premium by $451.35 or 21.15%. In that case, the premium is being increased by $425.04, which is an increase of 19.92% and equals 94.17% of the difference between the current premium and the indicated premium. In the case of the ?rst risk listed above, the indicated premium is $152.43 or 6 20.11% less than the current premium. In that case, the premium is being decreased by only $2.20, which is a decrease of 0.29% and equals 1.44% of the difference between the current premium and the indicated premium. Given the unequal manner in which rates are moving toward the indicated rate, we ?nd that this method of rating results in unfair discrimination between insureds with like insuring or risk characteristics in violation of of the Insurance Article. Conclusion With respect to Allstate?s rate ?ling under SERF we find the following: 0 Allstate?s use of cancellation notices to remove a discount at renewal constitutes using credit history to increase a renewal premium in violation of of the Insurance Article; - Allstate?s use of PIP claims as a variable in the loss model violates the prohibition on increasing a premium based on a PIP claim under of the Insurance Article; 0 Allstate?s use of ?full hit? as a variable in the retention model uses the credit history of operators other than the applicant in violation of of the Insurance Article and uses the absence of credit history or the inability to obtain credit history as a factor in rating a policy in violation of of the Insurance Article; 0 Allstate?s use of insurance scores for both insurance score tier placement and as a factor in the retention model violates the 40% limit on discounts and surcharges based on credit history under of the Insurance Article; and Allstate?s use of Complementary Group Rating results in rates that are unfairly discriminatory in violation of ?27-2l2(e) of the Insurance Article. As a result of these ?ndings, the ?ling is disapproved. Please note that our ?ndings regarding the loss model and the retention model are based on a review of a list of the variables used in the models and Allstate?s responses to questions regarding the models. The ?ndings are not based on a review of the models, since the models were not included in the ?ling. Given this, we are not expressing any opinion as to whether the models otherwise comply with the law. This action is subject to your right to a hearing under ?2-210 of the Insurance Article and COMAR 31.02.01. To request a hearing you must do so in writing and the request must be received by the Maryland Insurance Administration within thirty (30) days after the date of this letter. In the request, you must specify the grounds to be relied upon as a basis for the relief to be demanded at a hearing. If a hearing is not timely requested, this action will be ?nal. Please note that any corporation must be represented by counsel at a hearing on this action. CC: Very truly yours, Geoffrey N. Cabin Director, Rates and Forms L. Noel Patterson, Jr. Regional Counsel, Allstate Insurance Company J.iVan Lear Dorsey Principal Counsel, Maryland Insurance Administration Sandra Castagna Associate Commissioner, Property and Casualty, Maryland Insurance Administration Brenda Nelis Assistant Director, Rates and Forms, Maryland Insurance Administration