When Tennessee's insurance commissioner calculates a county mutual insurance company's compensation expense ratio, can the commissioner count the salary of an employee who lacks final underwriting authority?

Plain-English summary

State Senator Doug Overbey asked how broadly the Tennessee Department of Commerce and Insurance could read the "compensation expense ratio" rule for county mutual insurance companies. The narrow question was whether the ratio could include compensation paid to an employee who did not personally have underwriting authority. The AG said yes, as long as the employee played a role in evaluating risk or recommending underwriting.

The setup runs through three layers. The statute, Tenn. Code Ann. § 56-22-107(b), prohibits any officer, director, or other person whose duty it is "to determine the character of risk and upon whose decision the application for insurance shall be accepted or rejected" from receiving commission compensation. Compensation must instead be by salary and/or share of net profits. The legislature recognized that fixed-salary-plus-benefits arrangements can still get out of hand, so § 56-22-107(b)(3) and § 56-22-120 gave the Commissioner of Commerce and Insurance authority to set expense ratios by rule.

The Commissioner adopted Tenn. Comp. R. & Regs. ch. 0780-1-78. Section .02(2) defines "compensation expense ratio" as "the ratio of the total compensation (including, but not limited to, salaries, commissions, insurance benefits and retirement account contributions, as well as all local, state and federal taxes associated with such compensation) paid to all officers, directors, employees and other individuals who exercise authority over the underwriting decisions of a county mutual insurance company to the gross premium of the county mutual insurance company."

Section .03 sets the 30 percent cap. A company that exceeds 30 percent in any given year is "considered to be operating in a hazardous financial condition," which carries serious regulatory consequences.

The AG's reading turned on the phrase "exercise authority over the underwriting decisions." That phrase is not limited to people who hold final authority. People who do not have final say but who evaluate risks or recommend that the company underwrite a risk also "exercise authority over" those decisions, in the sense that their judgment shapes the result. So the Commissioner could include their compensation in the ratio calculation.

The practical effect was to widen the regulatory net. Underwriting analysts, junior staff who do file review, and senior officers who only sign off after recommendation could all count. A company that tried to keep its ratio low by routing labor to junior staff or by formally vesting final authority in one person could not exclude the rest of the underwriting workforce from the calculation.

Currency note

This opinion was issued in 2010. Subsequent statutory amendments, rule changes, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

County mutual insurance companies in Tennessee are a particular form of insurer governed by Tenn. Code Ann. §§ 56-22-101 et seq. They typically serve rural property markets where larger insurers may not write. The mutual form means the policyholders are also the members, which historically kept costs and overhead low. The statute caps commission-based compensation for risk-evaluators to prevent the pay structure from incentivizing aggressive underwriting that could threaten the mutual's solvency.

The 30 percent compensation expense ratio is the principal regulatory hurdle. If a company spends more than 30 percent of its gross premium on the compensation of those who shape underwriting, it is treated as operating in hazardous financial condition. That label triggers further regulatory action, ranging from a corrective plan to formal supervision.

Reading the rule narrowly (to cover only those with final authority) would let a company keep most of its underwriting workforce out of the calculation by formally placing decision-making in one individual. The AG's broader reading prevents that kind of arrangement from gaming the ratio.

Common questions

Q: Does the ratio include support staff who just process paperwork?
A: The rule's language requires that the person "exercise authority over the underwriting decisions." Pure clerical staff who do not evaluate risk or recommend coverage would not be covered. Staff who evaluate or recommend would be.

Q: What counts as "compensation"?
A: The rule lists salaries, commissions, insurance benefits, retirement contributions, and the associated employment taxes. "Including but not limited to" leaves room for other forms of compensation as well.

Q: What happens if a company crosses 30 percent?
A: Section .03(2) classifies it as operating in hazardous financial condition. That triggers regulatory action under the broader insurance code, which can include corrective plans, supervision, or in extreme cases rehabilitation.

Q: Can a company defend a high ratio by showing the underwriting is high quality?
A: The rule sets a flat 30 percent ceiling. The opinion does not endorse any "but my underwriting is good" defense. Companies typically seek to avoid the hazardous-financial-condition label through expense management rather than through justifications.

Q: How does the AG opinion change practice?
A: The opinion confirms that the Commissioner can take a broad view of who counts in the ratio. Companies that had hoped to limit the count to formal decision-makers would have to revise their staffing analysis.

Citations and references

Statutes:

• Tenn. Code Ann. § 56-22-101 et seq. (county mutual insurance companies)
• Tenn. Code Ann. § 56-22-104 (certificate of authority)
• Tenn. Code Ann. § 56-22-107(b) (compensation restrictions for risk-evaluators)
• Tenn. Code Ann. § 56-22-120 (rule-making authority for expense ratios)

Rules:

• Tenn. Comp. R. & Regs. ch. 0780-1-78 (county mutual insurance company rules)
• Tenn. Comp. R. & Regs. ch. 0780-1-78-.02(2) (compensation expense ratio definition)
• Tenn. Comp. R. & Regs. ch. 0780-1-78-.03 (30 percent ceiling; hazardous financial condition trigger)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2010/op10-115.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

December 6, 2010

Opinion No. 10-115

Compensation Expense Ratio under Tenn. Code Ann. § 56-22-120

QUESTION

Under Tenn. Code Ann. § 56-22-120, the Department of Commerce and Insurance is authorized to promulgate rules to set appropriate expense ratios for a county mutual insurance company. Under Department rules, "compensation expense ratio" means the ratio of the total compensation paid to officers and employees "who exercise authority over the underwriting decisions" of such a company to its gross premium. In calculating this figure, may the Commissioner of Commerce and Insurance include the compensation of an employee who does not have underwriting authority for the company?

OPINION

Under the Commissioner's rules, the compensation expense ratio may include the compensation of an employee who does not have direct or final underwriting authority for the company, so long as he or she plays a role in evaluating a risk or recommending that the company underwrite it.

ANALYSIS

This opinion concerns the determination of a "compensation expense ratio" for county mutual insurance companies. These companies are governed by Tenn. Code Ann. §§ 56-22-101, et seq. Under Tenn. Code Ann. § 56-22-104, a county mutual insurance company must obtain a certificate of authority from the Commissioner of Commerce and Insurance (the "Commissioner"). Tenn. Code Ann. § 56-22-107(b) provides:

(1) No officer, director or other person whose duty it is to determine the character of risk and upon whose decision the application for insurance shall be accepted or rejected shall receive as any part of the person's compensation a commission upon the premium, but the compensation shall be a fixed salary, and/or a share of the net profits of the county mutual insurance company that the board of directors may determine appropriate.

(2) Nothing under subdivision (b)(1) shall be construed to prohibit a county mutual insurance company from providing for its directors, officers and other employees reasonable benefits, including, but not limited to, directors' compensation, health insurance benefits and retirement benefits. Such benefits may be offered by a county mutual insurance company.

(3) The commissioner may promulgate rules to set appropriate expense ratios to address those expenses incurred in subdivisions (b)(1) and (2).

The Commissioner has adopted rules governing county mutual insurance companies at Tenn. Comp. R. & Regs. ch. 0780-1-78. These rules define the term "compensation expense ratio" as follows:

"Compensation expense ratio" means the ratio of the total compensation (including, but not limited to, salaries, commissions, insurance benefits and retirement account contributions, as well as all local, state and federal taxes associated with such compensation) paid to all officers, directors, employees and other individuals who exercise authority over the underwriting decisions of a county mutual insurance company to the gross premium of the county mutual insurance company[.]

Tenn. Comp. R. & Regs. ch. 0780-1-78-.02(2) (emphasis added). Section -.03 of the rules provides:

(1) No county mutual insurance company's compensation expense ratio may exceed thirty percent (30%) for any given year.

(2) Any county mutual insurance company whose compensation expense ratio exceeds thirty percent (30%) for any given year shall be considered to be operating in a hazardous financial condition.

The request asks whether the Commissioner, in calculating a compensation expense ratio, may include the compensation of an employee who does not have underwriting authority for the company. Under the rule, the ratio is to include the compensation of "all officers, directors, employees and other individuals who exercise authority over the underwriting decisions of a county mutual insurance company." This language is not limited to individuals with final underwriting authority. It may include other individuals who are involved in evaluating a risk or recommending that the company underwrite it. For this reason, the compensation expense ratio may include the compensation of an employee who does not have direct or final underwriting authority for the company, so long as he or she plays a role in evaluating a risk or recommending that the company underwrite it.

ROBERT E. COOPER, JR.
Attorney General and Reporter

BARRY TURNER
Deputy Attorney General

ANN LOUISE VIX
Senior Counsel

Requested by:
The Honorable Doug Overbey
State Senator
4 Legislative Plaza
Nashville, Tennessee 37243-0208