Section 500.1505. Unfairly discriminatory rates.

(1) For purposes of section 2109(1)(c) of the code, a rate for a coverage is unfairly discriminatory in relation to another    rate   for    the same coverage if the differential between the rates is not reasonably justified by differences in mean anticipated losses or expenses, or both, or by differences in the uncertainty of loss for the individuals or risks to which the rates apply. A reasonable justification shall be supported by a reasonable classification system, by sound actuarial principles, and  by actual and credible loss and expense statistics or, in  the case of new coverages and classifications, by reasonably anticipated loss and expense experience.

(2)       A  rate  is  not   unfairly  discriminatory  because  it  reflects differences in anticipated expenses  for  classifications  of   risks   with similar  anticipated  losses  or  because it reflects  differences   in anticipated losses for classifications of risks  with   similar anticipated expenses.

(3)   A reasonable classification system is a  system  designed  to  group individuals  or risks with similar characteristics into rating classifications which are likely to identify significant  differences  in mean anticipated losses or expenses,  or   both,  between    the groups, as determined by sound actuarial principles and by actual and credible loss and expense statistics or, in the case of new  coverages  or classifications, by reasonably anticipated loss and expense experience.

(4)    Sound actuarial principles shall include, but not be limited to, all of the following principles:

(a)    That data used in developing classifications and rates are derived from the experience of a population or sample of risks  that  is sufficiently similar to the anticipated insured population so that the statistics thereby obtained  can  reasonably be  expected  to produce representative and reliable estimates of the anticipated loss  and  expense experience for the insured population and so that such statistics are calculated in a manner that is suitable to their intended use.

(b)   That a reasonable predictive relationship can be demonstrated to exist between a characteristic used in defining a rating classification and anticipated losses, anticipated expenses, or the uncertainty  of  loss for the risks to which the classification applies.

(c)     That if rates for individual rating cells are calculated by means of arithmetic combinations of relativities for the classifications defining those cells, the relativities are combined  in  a   manner  that   equitably reflects the anticipated loss and  expense  experience for  those  rating cells.

(d)   That sampling techniques used in developing   classifications  and  in estimating loss and expense experience  are suitable  to   their  intended application.

(e)   That with regard to private passenger automobile insurance and private residential property insurance, rates for an  insurance  coverage provided are established in a manner that can reasonably be anticipated to produce  loss   ratios  which  are   substantially  uniform among the classifications, kinds, or types of individuals or risks to which the rates apply. Evaluation of loss ratios shall make appropriate adjustments for differences in deductibles and limits of liability among insureds, for expense provisions which are not allocated to premiums on a percentage-of-premium basis, and for differences   in  contingency  factors among classifications and shall give due consideration to the credibility of experience for groupings of individuals or risks, to trends in past and prospective loss experience, and to historical patterns between projected and realized loss ratios. For  purposes  of  this subdivision, "substantially uniform" means the absence of significant variations among loss ratios.This subdivision shall not be construed to prohibit the use of appropriate pure premium relativities to estimate or evaluate rate relativities.

(5)   Data of an insurer or rating organization used in calculating actual and credible loss statistics shall be of sufficient volume, or shall be combined in an appropriate manner with suitable data of sufficient volume, so that the statistics thereby calculated are reasonably credible  and  can reasonably be anticipated to produce  reliable  estimates  of   anticipated loss and expense experience.

(6)   Data for reasonably anticipated experience used in calculating rates for new coverages and in establishing new classifications shall, to the extent possible, be based on actual experience for similar coverages  and for groups of risks similar to the proposed classification and shall be of sufficient volume so that statistics thereby produced can reasonably be anticipated to produce reliable estimates of loss and expense  experience.

(7)  Relevant external information, including general economic data and other  indicators, may be  given due consideration  in   evaluating  or projecting loss and expense experience.

History: 1981 AACS.