William P. Hobby Building
333 Guadalupe,Suite 3-120
Austin, Texas 78701-3942

OFFICE OF PUBLIC INSURANCE COUNSEL
Deeia Beck
Public Counsel

Phone: (512) 322-4143
Fax: {5 12) 322-4 148

www.opic.state.Ix.us

October 20, 2015

J'ne Byckovski, FCAS, MAAA
Chief Actuary, Property and Casualty
Texas Department of Insurance
333 Guadalupe Street, MC 105-5F
Austin , TX 78701

Via Hand Delivery

RECEIVED
OCT2 0 2015
Property& Casualty

TexasDept.of Insurance
Re:

Allstate Fire and Casualty Insurance Co.
Private Passenger Auto Rate Filings - S5939, S22033, S612165
Complementary Group Rating (CGR)

Dear Ms. Byckovski :
Pursuant to TEX. INS. CODEANN. Section 2251.106, the Office of Public Insurance Counsel
(OPIC) objects to the above captioned personal auto rate filings. The filings produce rates that
do not comply with rating standards set forth in TEX. INS. CODE ANN. Sections 2251.051,
2251.052, 544.002, 544.052, and 560.002.
OPIC believes Allstate's use of Complementary Group Rating (CGR) is unfairly discriminatory
and contrary to risk and cost-based rating .
Background

Allstate initially filed their CGR rating factors on June 26, 2014. At the time, they disclosed that
CGR rating classes were determined as specified below:
"Micro-segments are assigned to a Complementary Group based on an
analysis of expected loss costs from the loss model described on Page 1 of
Attachment VII,policyholder disruption, and marketplace
considerations." [Filing S5939, Page 190]

Further review by TDI determined that retention models were used to assess policyholders'
likelihood of changing carriers due to a rate change. Individual policyholders were then assigned
to CGR microsegments that reflected, to an unclear extent, that likelihood. The CGR
microsegment assignment then affected the level of rate increase or decrease a policyholder
received as a result of the overall rate filing. For example, those more likely to accept a rate
increase received proportionally larger increases while those more inclined to select another
company received smaller increases.

 Office of Public Insurance Counsel
Allstate Fire and Casualty
Personal Auto Rate Filings
Page2

Allstate maintains that CGR rating is effectively no different than rate capping mechanisms
insurers have used for years to alleviate the effects of rate shock for certain classes of
policyholder. Their asserted goal is to effectively move policyholders toward their actuarially
determined rate level over time while improving, if not maximizing, policyholder retention.
They further argue that all the individual policyholder rates impacted by CGR are within a
reasonable actuarial range of rates.
CGR Rating is Contrary to Rating Standards

Both TEX. INS. CODEANN Sections 560.002 and 2251.051 require that rates be based on sound
actuarial principles and a reasonable relationship to expected loss and expense experience among
risks to avoid unfair discrimination. CGR-based rates both ignore actuarial indications and
create class distinctions that are neither risk nor cost-based . Essentially, rating distinctions are
based on a policyholder's sensitivity to price change.
Rating standards were not created in a vacuum, but they were established to prevent the unfair
discrimination in pricing that had historically occurred. Risk and cost-based rating is designed to
prevent arbitrary pricing that could potentially deny market opportunities to drivers who may not
be the most profitable demographically . Allowing clearly non-risk-and-cost-based rating factors
opens the door to further conditions where certain classes of consumers are unfairly priced out of
the market or shunted into low quality products .
CGR Rating Undermines Rating Plan Rationales

Since the 1990s, Texas has moved toward a more deregulated rating environment in both
commercial and personal lines. Concurrent with this has been the introduction of sophisticated
rating plans that segregate policyholders into ever more granular rating classifications. This
often creates dramatically wide rate discrepancies between policyholders who, in past times,
might have had similar premiums . Regulators and legislators were assured by the industry that
these rating plans were fair and existed to better price risks and reduce cross-subsidies among
policyholder classes.
CGR rating is the latest example that contradicts those claims . This system is a mechanism for
cross-subsidies among risks . Even if CGR-based rate effects "net out" positively and negatively
(something Allstate has not claimed even though OPIC asked that specific question), it is clear
that some policyholders shoulder a higher rate so another can gain a lower rate.
In addition, Allstate's new loss model essentially proves that Allstate's existing rating plan
produces grossly inaccurate rates and correcting this discrepancy is one of the alleged primary
functions of CGR. However, under Allstate's rating plan, the "reasonable range" of rates must
require accepting the demonstrably inaccurate existing rates as a range boundary. Why this must
occur has not been adequately explained .

 Office of Public Insurance Counsel
Allstate Fire and Casualty
Personal Auto Rate Filings
Page 3

TEX. INS. CODE §544.052

An insurer violates §544.052 by making or permitting unfair discrimination between individuals
of the same class and essentially the same hazard in the amount of premiums or rates charged for
insurance unless it is based on sound actuarial principles. 1 The current Allstate method meets
this definition of "unfair discrimination" because Allstate is knowingly treating individuals with
essentially the same risk hazards differently because they are adjusting the rate based on price
elasticity, and other non-risk factors, after they develop the actuarially sound rate. They are
knowingly charging higher rates to customers they deem less desirable to retain.2 OPIC
anticipates Allstate will attempt to claim they are actually placing each individual customer in
their own class (i.e. microsegment) so this statute cannot apply. However, this statute applies to
"individuals of essentially the same hazard" and it appears that individuals with very similar risk
profiles are being charged differently when the CGR/price optimization factor is applied at the
end. 3
An important distinction to make here is that Allstate is knowingly adjusting the premiums they
charge to similarly situated customers because of factors unrelated to risk or cost.4
TEX. INS. CODE §544.002

As discussed above, Allstate's auto filing involves the implementation of a new rating model that
they claim more accurately reflects their customers' risk profiles than their previous model and
results in very large changes to the indicated rates for many of their customers. After Allstate
applies their new risk model to develop a new indicated rate, they then apply their CGR process
to address the company's price optimization goals for each customer.
Allstate admits the CGR factor is applied to the rate after determining the risk-based policy
premium. As a result, the CGR factor is not a risk-based factor. Pursuant to Tex. Ins. Code Sec.
544.002, it is illegal to charge an individual a rate that is different from the rate charged to other
individuals for the same coverage because of the individual 's a) age, b) gender, c) marital status,
or d) geographic location.5
Allstate admits they are using protected class factors such as age, gender, and marital status as
variables in their CGR retention models to change their customer's premiums for non-risk
6
related reasons. This is simply illegal under 544.002.
Allstate also violates 544.002 when they use variables such as I) the birth date of oldest operator,
2) gender of the oldest operator, and 4) garaging territory to place their customers in

1

Cortez v. Progressive County Mut. Ins. Co., 61 S.W.3d 68, 75 (2001) (Tex.App.- Austin).
See Allstate 's Confidenti al Attachment C.
3
See Allstate's Confidential Attachment C.
4
See Allstate 's Confidential Atta chment D.
5
See Tex. Ins. Code Sec. 544.002(a)(2)
6
See Allstate ' s Confidential Attachment 1, pgs. I and 2.
2

 Office of Public Insurance Counsel
Allstate Fire and Casualty
Personal Auto Rate Filings
Page4

microsegments in order to apply their non-risk CGR factor to their customer's risk-based
premrnm.
CGR Rating is Not Rate Capping

In the abstract, there is nothing wrong with gradually moving rate classes to their actuariallyindicated level over time rather than in a single policy period. Even though there may be a shortterm class cross-subsidy, there is no intent to impose a disparate effect on one particular group
versus another. Insurers and regulators have historically supported rate-capping mechanisms to
modify potential rate shock to consumers resulting from rate changes.
The difference between historical rate-capping practices and CGR should be obvious . With
standard rate capping, there is no discriminatory intent. Traditional rate capping uses consistent
thresholds across classes rather than assigning, for example , a 25% rate cap for older drivers and
a 40% cap for youthful drivers. In that instance, discriminatory intent is introduced . That
example is similar to what CGR does .
Summary

Allstate's use of Complementary Group Rating (CGR) is unfairly discriminatory and contrary to
risk and cost-based rating. This is evident from an analysis of Allstate's filings and Allstate's
extensive responses to interrogatories from both OPIC and TOI.
OPIC reserves the right to modify our position should additional information become available.
Sincerely,

Deeia Beck
Public Counsel
cc:
Andi Colosi, Assistant State Filings Manager
2775 Sanders Road
Suite A2-W
Northbrook , IL 60062
Via email ; andi .colosi @allstate.com

Sara Waitt, General Counsel, TDI
Sandra Nicolas, Enforcement, TOI
Marilyn Hamilton, P & C Div., TOI
Ken Lovoy, OPIC

 Texas Department of Insurance
Propertyand CasualtySection - Actuarial Office
Mail Code 105-5F, 333 Guadalupe• P.O . Box 149104, Austin, Texas 78714-9104
512-676-6700 telephone• 512-490-1001 fax• www.tdi.texas.gov

October 21, 2015
Via Hand Delivery

Oeeia Beck .
Public Counsel
Office of Public Insurance Counsel
333 Guadalupe, Suite 3-120
Austin, TX 78701
Re: Allstate Fire and Casualty Insurance Co.
Personal Auto Rate Filings
TOI Link# S5939, S22033, S612165
Complementary Group Rating (CGR)
Dear Ms. Beck:
I wish to acknowledge receipt of your letter objecting to the captioned personal
auto rate filings. We may contact you during our review of the rate filing if
additional information is needed to better understand your objections.
The Department appreciates your participation in the review process and will
seek information as necessary from the filer to respond to your objections. We
will further communicate with you after receipt of an analysis of responsive
information.
Thank you for sharing your concerns.
Sincerely,

J~tk
Director/Chief Actuary

cc:

Andi Colosi, Assistant State Filings Manager,
Allstate Fire and Casualty Insurance Co.
Sara Waitt, General Counsel, TOI
Sandra Nicolas, Enforcement Association Commissioner, TOI
Mandy Meesey, Director, Enforcement Section, TOI
David Mattax, Commissioner of Insurance, TOI

www.tdi.texas.gov