State Auto Insurance Rating Regulation

General Auto Insurance Price Regulation:

State general auto insurance regulations in each of the 50 states are charged by state law with making sure that premiums for auto and other insurance are sufficient to ensure the solvency of the insurance company, but are not excessive or unfairly discriminatory. In attempting to fulfill these goals, every state, except Illinois, which repealed its rating law in 1971, has some kind of regulation about what rates insurers are permitted to charge.

From a public policy perspective, the major problem in rate regulation is to find rates that properly balance the needs of insurance consumers for adequate insurance at reasonable rates and the needs of insurers for profits adequate to attract necessary capital. Approaches to the problem range from complete state regulation of rates to complete free market deregulation, with many variations in between.

What type of rating regulation best meets the needs of consumers?

From an overall perspective, one would expect public policy in this area to tilt toward an environment that is supportive of competition. In keeping with the general preference in the United States for a free market economy, auto insurance since the first policy was written by Travelers Insurance Company in 1897 has been in the private sector. The preference for the private sector reflects the overall judgment that competition between private sector companies provides overall societal benefits, such as lower cost, higher efficiency and greater innovation than would be provided by a single government run entity. Because the vendor of choice is the private rather than the public sector, the conditions necessary for the private sector to perform need to be fostered. What type of rating regulation best meets the needs of consumers for reasonable insurance premiums and insurance companies for sufficient profit to attract capital?

What is the relationship of rating regulation to other aspects of how auto insurance is written?
The first law permitting an insurance commissioner to review rates to assure that they were not “excessive, inadequate, or unfairly discriminatory with regards to individuals” was passed in Kansas in 1909.

Earlier, toward the end of the 19th century, price wars and a scramble for short-term revenues at the expense of more conservative actuarially-based policies had caused many insolvencies, leaving policyholders without coverage. In the wake of these insolvencies, the insurance industry formed compacts designed to promote “correct pricing practices”, but the compacts proved unpopular and were abandoned. State control of rates was seen as a better solution to the problem of potentially destructive price wars than a system of compacts, which were largely beyond public control.

In 1914, the U.S. Supreme Court (in German Alliance Ins. Co. vs. Lewis, 233 U.S. 389) articulated the rationale for closely regulating the business of insurance. In the Court’s opinion, insurance was a business “affected with a public interest”, first, because insurance is often a legal or contractual prerequisite for other market activity, and second, because the complexity of the insurance contract places the average consumer at a comparative disadvantage in the marketplace. This ruling served as the justification and impetus for increased state regulation.

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