(1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies written in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return.
    (2) As used herein:
    (a) “”Insurance”” means all classes of insurance subject to Florida Statutes § 627.062
    (b) “”Subline”” means a type of insurance uniquely identified for purposes of establishing rates under Florida Statutes § 627.062
    (c) “”Property insurance subline”” means insurance as defined in Florida Statutes § 624.604
    (d) Insurer includes rating organizations licensed in Florida.
    (e) An underwriting profit and contingency factor can be positive or negative.
    (3) Each insurer shall determine separately for each subline of insurance the expected patterns of loss payments over time associated with insurance written in Florida. The determination shall be made using Florida accident year or policy year loss payment patterns, and must fairly represent the insurance loss transaction of the insurer. If Florida data is not credible or is inappropriate, the insurer may exercise reasonable actuarial judgment in utilizing other relevant data or procedures or may use the underwriting profit and contingency factors referred to in subsection (9) of this rule.
    (4) Each insurer shall determine YA, the expected investment income yield on invested assets representing unearned premium and loss reserves. The expected investment income yield, YA, shall be calculated using the quantities and formula below:
YA = YN WN + YoWo
Where:

YN
=
Expected investment income yield on assets newly invested or reinvested during the time the new rates are expected to be in effect.
YO
=
Expected investment income yield on assets invested prior to the time the new rates are expected to be in effect.
WN
=
Proportion of assets, held during the time the new rates are expected to be in effect, that is expected to be newly invested or reinvested.
WO
=
1 – WN
The above expected investment income yield, YA, shall be used for purposes of this rule unless evidence is presented that this quantity is not the investment income yield reasonably expected by the insurer.
    (5) Separately for each subline, each insurer shall, using the average date of premium remittance by the insured, determine the discounted value of the expected loss payment pattern determined in subsection (3) using the expected investment income yield, YA, calculated in subsection (4). The undiscounted pattern minus the discounted pattern for each subline is to be expressed as a percent of the expected subline premium that is associated with the series of loss payments over time. This difference is the investment income opportunity associated with the subline.
    (6) The investment income opportunities calculated in subsection (5) shall be used as follows to develop the underwriting profit allowance, to be used in rate filings:
    (a) Select and specify the underwriting profit and contingency factor to be used in rate filings for the property insurance subline with the smallest investment income opportunity as calculated in subsection (5). If an insurer does not write property insurance in Florida, it shall use relevant data for such property insurance subline from areas other than Florida or shall use industry data, as determined by reasonable actuarial judgment. The selected underwriting profit and contingency factor is presumed to give due recognition to property insurance investment income. An underwriting profit and contingency factor greater than the quantity five percent is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable expected rate of return. In such case, the criteria presented in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence.
    (b) Determine the investment income differential between the property insurance subline and any other subline by subtracting the investment income opportunity for the property insurance subline as calculated in subsection (5) from the investment income opportunity for any other subline as calculated in subsection (5).
    (c) The underwriting profit and contingency factor for any subline other than that specified in paragraph (6)(a) shall be the underwriting profit and contingency factor for the subline from paragraph (6)(a), minus the investment income differential from paragraph (6)(b). An underwriting profit and contingency factor greater than this quantity is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filings that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such cases, the criteria presented in subsection (7) shall be used by the Office in evaluating this supporting evidence.
    (7) An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination:
    (a) An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer’s solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or
    (b) Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect.
    (8) Each insurer filing insurance rates in Florida shall use an underwriting profit and contingency factor for each subline that is developed in accordance with this rule. The combined profit and contingency factor shall be quantified and stated as a single percentage factor. The entire factor and the component parts of the factors shall be justified by the insurer proposing to use the factor.
    (9) For use as permitted in subsection (3) of this rule, the Office shall annually establish appropriate underwriting profit and contingency factors by annual statement lines or classes subject to this rule. Such factors shall be derived by using available and actuarially reasonable industry data. The factors shall be established by order and provided to all affected insurers prior to the date their use is required. Factors distributed for the previous year shall remain in effect until new factors are published.
Rulemaking Authority 624.308(1), 627.062(2)(b)4. FS. Law Implemented 624.307(1), 627.062(2)(b)4. FS. History-New 4-9-87, Amended 1-30-91, Formerly 4-72.003, 4-170.003.