Specific Mechanisms of General Car Insurance Rate Regulation

Controlling General Car Insurance Costs

The NAIC classifies the various regulations used by states to set general car insurance rates into a number of groups. These are listed below in order of their degree of government control of rates.

1. State-Made Rates: The state insurance department, in consultation with insurance industry representatives, promulgates the rates to which all insurers must adhere. States (2): Massachusetts, Texas.

2. Prior Approval Laws: All insurers must file their proposed rates with the state insurance department and provide data with these filings to show that the rates are not excessive, inadequate, or unfairly discriminatory. A number of states have so-called deemer clauses, which say that if the insurance commissioner neither approves nor disapproves the rate change within a certain period, such as 90 days, the rate is deemed approved.

States (17): Alaska, Hawaii, Kansas, Nebraska, New Hampshire, New Jersey, New York, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Washington, West Virginia. Also District of Columbia and Puerto Rico. The state of California adopted a prior approval system under Proposition 103. This law is now (March 1989) being challenged in the Supreme Court of California.

3. Modified Prior Approval Laws (also known as modified file and use): Insurers can use rates without prior approval if based solely upon a change in loss experience. States (3): Alabama, Indiana, Louisiana.

4. Flex Rating Laws: Rates can be modified by insurers without prior approval if they are within a certain percentage range, also known as a band. The size of these bands varies by state and by line of insurance, but most are between 10 and 25 percent. States (1): Kentucky.

5. File and Use Laws (bureau rates advisory only): Rates become effective immediately upon filing, with no affirmative action of the commissioner required. States (18): Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, Ohio, Oregon, Rhode Island, South Dakota and Virginia.

6. Use and File Laws: Rates must be filed within some specific period of time after being used in the state, usually 15 or 30 days. States (5): Florida, Missouri, Utah, Vermont and Wisconsin.

7. No Filing Laws: Insurers are not subject to any filing requirements. States (3): Idaho, Illinois (no rating law) and Wyoming.

In general, systems ranked at the top of the list are less competitive than systems at the bottom half. However, the implementation of any system can greatly affect competitiveness in the marketplace. For example, if under a prior approval system, maximum rates are set relatively high, insurance companies will compete actively under the maximum level and the results will be similar to a system with less regulatory structure.

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