Do states control general auto insurance premiums?

Controlling General Auto Insurance Premiums:

In 1921 the National Convention of Insurance Commissioners adopted the “1921 Standard Profit Formula”, which acted as a guide to regulators in determining the “proper” balance between rates which are sufficient to assure solvency yet low enough to prevent excessive profits. This formula, the first attempt by regulators to specifically define the meaning of “adequate but not excessive” general auto insurance rates, called for a five percent underwriting margin (investment income was not to be taken into account).

Throughout the first half of the 20th century the adoption of rate regulatory statutes in the United States continued to grow. By 1944 all but three states had statutes designed to control insurance rates. In 33 of these states, a formal mechanism was in place which, at a minimum, provided for routine review of rates by the commissioner.

How insurance is regulated in the United States

Following the passage of the McCarran-Ferguson Act in 1945, which explicitly provided for the state regulation of the business of insurance, the National Association of Insurance Commissioners (NAIC) adopted the “All-Industry” model statutes. These called for a bureau-rate prior approval system. By 1955 most states had adopted such statutes. There was one significant exception to this trend. California never adopted the “All-Industry” model statute. It adopted a “no filing” system, a strongly competitive system of rate regulation which ‘would prove to be a testing ground for the subsequent use of competitive systems in other states. Illinois, which had originally enacted a prior approval law, subsequently (1971) repealed it in the belief that the best system of rate regulation is the marketplace.

The general trend toward deregulation in the United States during the 1960s and 1970s extended to the insurance industry, and the California experience was often cited as an example of the effectiveness of competitive rate regulation. In 1980, the NAIC adopted its first model statute for a competitive rating system and by 1984 varying forms of competitive rating were operative in 25 states. This constituted a major shift in the way the business of insurance was regulated in the United States.


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