Section 2644.5 - Catastrophe AdjustmentIn those insurance lines and coverages where catastrophes occur, the actual catastrophic losses of any one year in the recorded period are replaced by an adjustment based on the average annual loss generated from one or more catastrophe models as described in Section 2644.4.5, or an adjustment based on a multi-year, long-term average of catastrophe losses net of actual and anticipated salvage and subrogation recoveries, as described in subdivision (b) of this section, or except as prohibited in subdivision (e) of this section a combination of the methods specified in subdivisions (a) and (b).
(a) For fire following earthquake, wildfire, and terrorism exposures in any line of insurance, an insurer may include an adjustment based on the average annual loss generated from one or more catastrophe models. The use of such models shall comply with the requirements set forth in subdivision (e) of Section 2644.4.5. Further, the average annual loss may be adjusted to include a provision for defense and cost containment expenses (DCCE), either by applying a historical ratio of noncatastrophe DCCE to noncatastrophe loss or by applying a historical ratio of catastrophe DCCE to catastrophe loss.(b) In any event, an insurer may project its catastrophe adjustment based on a multiyear, long-term average of catastrophe losses and DCCE, net of actual and anticipated salvage and subrogation recoveries. Catastrophe adjustment for perils other than those that are permitted to be modeled under subdivision (a) of this section or pursuant to subdivision (c) of Section 2644.4.5 must be based on such multiyear long-term average.(1) For residential and commercial property lines, the adjustment shall be based on the average of the ratio of ultimate catastrophe losses and DCCE to amount of insurance years (AIY). For purposes of this section, the term AIY shall reflect the total combined limits (dwelling, additional structures, personal contents and loss of use) pertaining to the property coverages underlying each policy. For private passenger and commercial automobile physical damage, the adjustment shall be based on the average of the ratio of ultimate catastrophe losses and DCCE to ultimate noncatastrophe losses and DCCE.(2) The number of years over which the average shall be calculated shall be at least 20 years for residential and commercial property lines and at least 10 years for private passenger, and commercial, auto physical damage. Where the insurer does not have enough years of data, or has a limited amount of data for years for which it does have data, the insurer's data shall be supplemented by appropriate data for those years. The number of years over which the average shall be calculated for any other line with catastrophe exposure that is permitted under this subdivision (b) to have a catastrophe adjustment shall be based on the most actuarially sound assumptions. There shall be no catastrophe adjustment for private passenger, or commercial, auto liability.(c) Regardless of which method is used for catastrophe adjustment, insurers shall submit all of the following, based on the data aggregation method used for the recorded period, whether the recorded period is expressed in terms of accident years, policy years or report years, through the most recent year of the recorded period: (1) The insurer's history, by year, of California catastrophe losses, displayed separately for paid losses, case-incurred losses and Incurred But Not Reported (IBNR) reserves.(2) The insurer's history, by year, of California noncatastrophe losses, displayed separately for paid losses, case-incurred losses and IBNR reserves.(3) The insurer's history, by year, of California catastrophe Defense and Cost Containment Expenses (DCCE), displayed separately for paid DCCE, case-incurred DCCE and IBNR reserves.(4) The insurer's history, by year, of California noncatastrophe DCCE, displayed separately for paid DCCE, case-incurred DCCE and IBNR reserves.(5) The insurer's history, by year, of California received salvage and subrogation recoveries. Subrogation recoveries shall include the proceeds of any actual sale or divestiture of subrogation rights.(6) The insurer's history, by year, of California anticipated salvage and subrogation recoverables. Subrogation recoverables shall include the reasonably foreseeable proceeds of any anticipated sale or divestiture of subrogation rights.(7) The insurer's history, by year, of California AIY for residential and commercial property lines.(8) For residential and commercial property lines, the insurer's projected AIY for the policy effective period. The trend factor that is used to project AIY shall be based on the exponential curve of best fit. Insurers shall file the most recent 27 quarters of company-specific AIY and earned exposure data. The insurer shall file its rate change application using the single data period for AIY and, as specified in section 2644.7, premium and loss trend, which data period the insurer determines to be the most actuarially sound. The Commissioner may require the use of an alternative data period if the Commissioner determines that use of such alternative data period is the most actuarially sound approach.(9) For private passenger and commercial auto physical damage, the insurer's projected ultimate noncatastrophe losses for the most recent year in the recorded period, as determined by the application of Sections 2644.6 and 2644.7.(10) The insurer's current definition of catastrophe and the period of time it has used such definition.(11) The insurer's definition of wildfire and the period of time it has used such definition.(12) The name of any major event or events contributing to the year's catastrophic losses, for instance, the "Cedar Fire," and the peril or perils associated with those losses.(d) The catastrophe adjustment shall reflect any changes between the insurer's historical and prospective exposure to catastrophe due to a change in: (1) The insurer's coverage or other policy terms; or(2) The insurer's mix of business.(e) For any individual peril, projected aggregate catastrophe losses cannot be based upon a combination of modeled and historical losses associated with that peril.(f) Catastrophe adjustment, whether based on modeled or nonmodeled losses as prescribed by 2644.5(a) or (b) above, shall apply as a single annual projection once all other adjustments to loss have been made. The catastrophe adjustment shall be expressed as a dollar amount of catastrophe losses per earned exposure, where earned exposure is taken from the most recent year of the recorded period.(g) For residential and commercial property lines, no trend shall be applied to the catastrophe adjustment except for the trend factor that is used to project AIY as described in subdivision (c)(8) of this section.Cal. Code Regs. Tit. 10, § 2644.5
Note: Authority cited: Sections 1861.01 and 1861.05, Insurance Code; and 20th Century v. Garamendi (1994) 8 Cal.4th 216. Reference: Sections 1861.01 and 1861.05, Insurance Code; and Calfarm Insurance Company v. Deukmejian (1989) 48 Cal.3d 805.
Note: Authority cited: Sections 1861.01 and 1861.05, Insurance Code; and 20th Century v. Garamendi, 8 Cal.4th 216 (1994). Reference: Sections 1861.01 and 1861.05, Insurance Code; and Calfarm Insurance Company v. Deukmejian (1989) 48 Cal.3d 805.
1. New section filed 8-13-91 as an emergency; operative 8-13-91 (Register 92, No. 3). A Certificate of Compliance must be transmitted to OAL 12-11-91 or emergency language will be repealed by operation of law on the following day.
2. Repealed by operation of Government Code section 11346.1(g) (Register 92, No. 15).
3. New section refiled 2-14-92 as an emergency; operative 2-14-92 (Register 92, No. 15). A Certificate of Compliance must be transmittted to OAL 6-15-92 or emergency language will be repealed by operation of law on the following day.
4. Repealed by operation of Government Code section 11346.1(g) and new section filed 3-15-95; operative 3-15-95. Submitted to OAL for printing only pursuant to Government Code section 11343(a)(1) (Register 95, No. 11).
5. Amendment filed 1-3-2007; operative 4-3-2007. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g)(Register 2007, No. 1).
6. Amendment of section and NOTE filed 12-12-2024 pursuant to Government Code section 11343.8; operative 12/12/2024. Submitted to OAL for filing and printing only pursuant to Government Code section 11340.9(g) (Register 2024, No. 50).