Developing a rating manual is not complicated, but creating a manual that is compliant–while simultaneously providing the flexibility that supports your company’s competitive needs–is an entirely different story. Too often we see insurance companies re-use the format, structure, and content of previously approved competitor rating manuals that are themselves riddled with errors, inconsistencies, and ambiguities. This can lead you to submit a manual that contains unclear or incomplete information, which can lead to questions and even filing disapprovals by state Departments of Insurance (“DOI”).
Is it worth the extra time and effort to review your rating manual for compliance before submission? What’s the true cost if you gloss over this step?
In this article, we will outline a number of ways subjecting your rate manual to review by experts in regulatory compliance services before submission can help protect your company’s reputation–and your bottom line.
By neglecting to perform a compliance review before submitting your rating manual, you are setting yourself up for material losses of both time and money. Consider these main benefits of having a rating manual that is peer reviewed for compliance issues before you submit:
With a more compliant rating manual, you will get fewer DOI interrogatories and help to prevent a longer timeline or even disapproval. Rating manuals that are developed in a clear and concise manner with a clear rate order of calculation, appropriate headers, edition dates and page numbers promote clarity. This is not only true for the DOIs, but also for your company’s IT department when it comes to programming and implementing new rates or rate changes in your system as quickly as possible.
When manuals are not clear, it can create the need for costly and time-consuming refilings or even incorrect policyholder rating. This could cause even more problems during a market conduct exam.
It is important that your rating manual has corresponding rules for any forms or endorsements that have an associated rate. The rule should describe the form/endorsement and how it is used to prevent any discrimination or inconsistent application across similar insureds. It is also important to provide clarity on other factors/rates that may or may not impact an endorsement premium, such as minimum premiums or other manual factors, discounts and surcharges. Lack of consistency and clear rules can muddy the process of rating a policy.
If your rating manual or rules are incorrect or inconsistent and the errors are material, it could warrant an entire nationwide refiling to correct it. Nationwide filings have an associated cost and timeline. While the initial nationwide filing is necessary to achieve approval, minimizing the need for future filing revisions could save your company time and money.
During a market conduct exam, examiners typically rate policies and see if they get the same premium you have charged your insureds. If your manual is unclear, missing information or in error, it significantly increases the likelihood of large fines and the need for avoidable nationwide refilings.
During our decades of providing expert insurance consulting services for all Property & Casualty lines of business across all jurisdictions, we have reviewed and developed hundreds of rating manuals. We have seen the good, the not-so-good, and some downright sloppy messes.
Here are some tips on how to avoid three of the most common costly and time-consuming errors.
Make sure you include rules for forms and endorsements. Many manuals are unclear on how to rate forms and endorsements to achieve the final premium. If you put these rules for forms in your rating manual, it helps prevent ambiguity and assists with programming by your IT department.
Eliminate ambiguity by adding a rate order of calculation. While many personal lines manuals (like automobile and homeowners) include a rate order of calculation, many commercial line manuals do not. If you do not include a rate order of calculation (which explains the logic on exactly how to rate a risk), at least create an internal version, or a simple Excel-based rating engine, to help your team understand the complete rating methodology for arriving at the final rate.
Be on the lookout for missing rules. When it comes to insurance ratemaking, no detail is too small. Pay close attention to things like rounding rules, minimum premium rules, and waiver/additional premium rules. If you are not clear, it can jeopardize the compliance of your manual.
Handling all regulatory compliance services in-house might seem like a good idea, but beware of the potential problems it could cause. Lacking deep experience while developing a new rating manual without comprehensive knowledge of state requirements could lead to costly time-consuming errors. We recommend working with an insurance consulting expert who specializes in rate manual development and associated compliance issues. A review by a third-party with a fresh perspective and thorough knowledge of state DOI requirements will help expose errors and give you the opportunity to implement changes before your initial submission.
The bottom line when it comes to rating manuals: get it right the first time or risk paying the price.
Talk to the insurance consulting experts at Perr&Knight about a rating manual compliance review today.