Regulation Insurance

Insurance is regulated by the individual states. The move to modernize insurance regulation is being driven in part by the globalization of insurance services.

Some large U.S. companies that operate in other countries support the concept of a federal system that provides one-stop regulatory approval while others believe the merits of a state system outweigh the virtues of a single national regulator.

As a result of discussions about the merits of each system, states are making it easier for insurers to respond quickly to market forces. States monitor insurance company solvency. One important function related to this is overseeing rate changes.

Rate making is the process of calculating a price to cover the future cost of insurance claims and expenses, including a margin for profit. To establish rates, insurers look at past trends and changes in the current environment that may affect potential losses in the future.

Rates are not the same as premiums. A rate is the price of a given unit of insurance $2.50 per $1,000 of earthquake coverage, for example. The premium represents the total cost of many units. If the price to rebuild a house is $150,000, the premium would be 150 x $2.50.

Rates vary according to the likelihood and potential size of loss. Using the example of earthquake insurance, rates would be higher near a fault line and for a brick house, which is more susceptible to damage, than a frame one.

While the regulatory processes in each state vary, three principles guide every state’s rate regulation system: that rates be adequate (to maintain insurance company solvency), but not excessive (not so high as to lead to exorbitant profits), nor unfairly discriminatory (price differences must reflect expected claim and expense differences).

Recently, in auto and home insurance, the twin issues of availability and affordability, which are not explicitly included in the guiding principles, have been assuming greater importance in regulatory decisions.

In line with these principles, states have adopted various methods of regulating insurance rates, which fall roughly into two categories: “prior approval” and “competitive.”

This does not mean there is no competition in states using a prior approval system. Most approved rates in prior approval states are the rates used, but in some cases, particularly in commercial coverages, companies compete at rates below these approved ceilings.

Regulation Modernization

Increasingly, even in the most regulated states, officials are relying on competition among insurance companies to keep rates down and are modernizing and streamlining the rate setting process. The move to modernize insurance regulation is being driven in part by the globalization of insurance services.

As a result of discussions about the merits of each system, states are making it easier for insurers to respond quickly to market forces.

Since 2009, various pieces of legislation have been introduced in Congress that respond to a number of concerns: lack of an entity at the federal level that can represent insurance interests, particularly in the discussion of international issues; the need for better oversight of systemic risk the interconnectedness of the risk assumed by a few large financial services companies whose failure could bring down the entire financial system; and the need to streamline the regulation of reinsurers and surplus lines insurers.

For example, in Georgia, a law was signed in May 2008 that allows auto insurance companies to adjust most rates without the prior approval of the insurance commissioner. Georgia joins at least 30 other states that let rates more closely reflect competition in the marketplace.

Type of State Rating Laws

Prior Approval: The insurer must file rates, rules, etc. with state regulators. Depending on the statute, the filing becomes effective when a specified waiting period elapses (if the state regulator does not take specific action on the filing, it is deemed approved automatically) or the state regulator formally approves the filing.

A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

Modified Prior Approval: This is a hybrid of “prior approval” and “file and use” laws. If the rate revision is based solely on a change in loss experience then “file and use” may apply. However, if the rate revision is based on a change in expense relationships or rate classifications, then “prior approval” may apply.

A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

Flex Rating: The insurer may increase or decrease a rate within a “flex band,” or range, without approval of the state regulator. Generally, either “file and use” or “use and file” provisions apply. Generally, the insurer must file rate increases or decreases that fall outside the established “flex band” with the state regulator for approval.

Typically, “prior approval” provisions apply. The “flex band” is set either by statute or by the state regulator. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

File and Use: The insurer must file rates, rules, etc. with the state regulator. The filing becomes effective immediately or on a future date specified by the filer. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

Use and File: The filing becomes effective when used. The insurer must file rates, rules, etc. with the state regulator within a specified time period after first use. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

State-Prescribed: The state regulator determines and promulgates the rates, classifications, forms, etc. to which all insurers must adhere. Insurers are usually permitted to deviate from state prescribed rates, classifications, forms, etc., with the approval of the state regulator.

No File/Record Maintenance: The insurer need not file rates, rules, etc. with the state regulator. Rates, rules, etc. become effective when used. The state regulator may periodically examine insurer(s) to ensure compliance with the law.

Generally, there are record maintenance requirements, under which insurers must make their rating systems available to the state regulator for examination. A state regulator may order discontinuance of the use of the material at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.

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