Kathleen Sebelius
Commissioner of Insurance
Kansas Insurance Department

  Bulletin No. 1996 1


TO:                  All companies writing homeowners' insurance

FROM:             Kathleen Sebelius, Commissioner of Insurance

SUBJECT:       Territorial rating

DATE:              January 5, 1996


Over the last several years a significant debate about the need for territorial rating for homeowners' insurance has occurred in Kansas, culminating in a legislative charge to study this issue and report to the 1996 Legislature whether territorial rating should be allowed in Kansas and what my recommendations for solving these problems might be. The task force appointed by the Governor and legislative leadership concluded territorial rating should be allowed in Kansas, either by my office or through legislative mandate. While that appears to be a majority view, I believe there is also consensus inside and outside the industry that territorial rating alone will not solve more fundamental problems with availability and affordability of insurance in this essential product. I have announced contemporaneously with this Bulletin, steps this office will take to tackle those fundamental problems. it is my hope those steps, together with balanced use of territorial rating, will significantly improve availability and, eventually, affordability in this market.

I have concluded this office will allow territorial rating. However, I am mindful that unrestricted use of territorial rating in this state will work enormous hardship on many insureds in this state and that it is not in the best interests of policyholders of this state to allow unrestricted rating of homeowners' insurance by territory. Therefore, effective immediately, territorial rating plans may be submitted to this Department, within the following guidelines:


1.  There must be at least one year between the effective date of the company's current rating plan and the effective date of the company's proposed territorial rating plan. Effective dates for subsequent rating changes may be only on annual renewal dates thereafter. Filings must state a specific effective date for new business under the territorial rating plan.

2.  Use of a territorial rating plan is not mandatory. However, a company may not use a "single territory" and "multiple territory" rating programs simultaneously.

3.  Any company electing to use territorial rating must file their rules and the rating plan and comply with current Department filing procedures, including the following specific requirements:

The rating plan submitted to the Department must reflect the total indicated rate change the company expects for each territory.

The plan must phase in that total indicated change for that territory over a three year period, with three equal annual rate changes, each of which may not exceed 20%. For example, a company which develops an indicated rate increase for a territory of 60% and who wishes to ultimately get to that rate, must have a phase‑in plan that requests equal 20% increases in rates for each of the three years of the plan. While the initial filing must show what the total anticipated rate change is expected, each rate filing will be reviewed by the Department every year and the company is free to adjust each annual rate filing as they believe their actual loss data supports.  

No territorial rating plan will be approved that is not revenue neutral, i.e. if one of your territories calls for rate increases, the plan must provide for concurrent rate decreases in other territories, so that the aggregate effect of applying these rating plans will be no increase in the premium recouped from all Kansas territories. Any territory rating plan submitted to this Department must address this issue and specifically explain how revenue neutrality was accomplished. 

4.  There are no restrictions on the number of zones or territories. Each company is free to use the number of territories they believe is best for their company and which they can justify to the Department.

5.  Companies must keep premium and loss experience by the territories or zones they use in their plans, in order to justify future rate changes in those territories. In addition, in order for the Department to accurately monitor whether the change to territorial rating has an impact on availability, companies electing to use territorial rating must report in each rate filing the policy count by territory for all homeowners' classes.

6.  Companies electing to use a territorial rating plan shall be required to send a notice to affected insureds at least 60 days prior to the effective date of the new rates. The form of that notice must be submitted to the Department for approval. An example of a notice deemed appropriate by the Commissioner is attached to this Bulletin.

7.  The use of "reference Filings" is permitted, as long as Reference Filing Agreement Forms are filed and approved. We do not anticipate that rating organizations will immediately file territorial rating plans until they have developed adequate experience data, so companies may wish to adopt reference filings based on other company filings. Department staff will make every effort to be helpful in that regard.

8.  Territorial plans or zones will be closely scrutinized to verify the geographical area selected is based solely on losses and not based on impermissible grounds, e.g. the demographic makeup of its residents.



                Department staff will monitor the effectiveness of territory rating during the first year or two of its operation to determine whether results promised by the insurance industry are achieved, i.e. that Kansas enjoys a marked increase in availability of insurers and capacity, with the attendant improvement in affordability in this market. Insurers are encouraged to explore any other rating methods or development of innovative homeowners' policies, in addition to territorial rating, they believe will help us all achieve the two goals of better availability and affordability in this line of insurance. Our collective success in achieving these goals will determine whether territorial rating, as initially implemented in this state, continues as a means of encouraging efficient and fair marketing of this insurance.  

           I  encourage you to contact our Fire and Casualty Division in advance of preparing your filing to discuss any questions you have, so that we can promptly respond to any plan you file with us.



SAMPLE Notice to Policyholders


Dear Policyholder:


The increase or decrease in this homeowner policy reflects the losses in your area of the state. Kansas has joined 46 other states in allowing insurance companies to divide the state into territories for the purpose of pricing homeowners' policies based on losses in each territory. The 1995 Kansas Legislature convened a Task Force to study the effect wind and hail losses are having on the cost of homeowners' policies and the Task Force recommended that insurance companies be permitted to price homeowners' policies by territories. Since January of 1996, insurance companies are allowed to calculate homeowners' premiums based on their loss experience in different geographic regions of the state. If you have any questions about how your premium was calculated or more specific reasons for the change in Your premium, please contact your agent.




Clarification of Bulletin 1996 - 1



TO:                Interested homeowner insurers
FROM:           Kathleen Sebelius, Commissioner of Insurance
SUBJECT:      Revenue neutral guideline
DATE:            March 22, 1996

Based on the number of calls our staff is fielding, it is clear there is still some confusion about what we meant by "revenue neutral" in our territorial rating bulletin. Perhaps the best way of clarifying this issue is to answer specific questions you have raised:  

"If we do territorial rating we will be frozen at 1995 rates for three years. ‑ It was never the intent of our bulletin to freeze companies at existing rates. Companies filing territorial rating plans will be permitted reasonable rate increases, within the limits specified in the bulletin, and as their loss and expense data will justify.

"We cannot file an overall rate increase at the same time as a territorial rating plan." ‑ It is true we will not permit two separate rate filings in the same year. This has been the Department policy for years. However, we will permit companies to file an adjustment to base rates for all policyholders and, in that same filing, an overlay of territorial zone factors that adjust those base rates in accordance with your loss data. We expect the net effect of those steps to comply with the restrictions spelled out in our bulletin, e.g. restrictions on increases and revenue neutral requirements. The best analogy of what we expect and will approve is a filing that follows the model you presently use in personal lines automobile ratemaking. While the territorial rating filing will differ, in that the Commissioner has placed restrictions on filings that do not apply to auto, the methodology will be very similar.