How Are Insurance Rates Are Regulated?

When you purchase business insurance, you want to know who determines the rates of your commercial policies. Are the rates set by insurers or other regulators; the state or federal government?

We’ll be looking to answer these questions below:

State Regulations

First off, the states regulate insurance companies. Every state has a specific body assigned for overseeing insurance issues. An appointed or elected commissioner would head the insurance department.

The extent of state regulation for insurance would depend on the state itself. Some would retain a lot of control while other would leave it flexible.

Reasons for Not Having Federal Regulation

Several insurance companies conduct their business in many states. Federal control still does not apply here due to the 1945 McCarran-Ferguson Act. This was against a Supreme Court decision to let the federal government regulate insurance.

However, this decision could have ended up eliminating control by the state. Hence, the McCarran-Ferguson Act gave states the power to tax insurers and regulate them. There are still three exceptions here:

• Insurers are still under anti-trust acts by the federal government
• There may be federal insurance laws that cancel out state laws
• Federal laws could still ban insurers from taking part in coercion, intimidation, or boycotts.

The Dodd-Frank Act was passed by Congress in 2010. This regulated financial institutions on a new level. It also established the FIO (Federal Insurance Office). Its purpose was to make sure the insurance industry is stable financially. However, it only acts as an advisory body, not regulatory.

Rate Regulation

The regulation of insurance rates by states have several reasons. these include:

• Ensuring reasonable rates; not too high nor too low. This ensures that insurers stay solvent
• Preventing discrimination unless the reasons are valid

Rate Laws

There is some state control over insurance rates, but the rate laws vary according to the sate in question. Some states require all rates to be pre-approved, while others don’t. Insurance rate laws have six types:

• Insurers with prior-approval: They must submit their rates and wait for them to get approved before using. Some states may allow the insurer to assume approval if the rating authority doesn’t get back to them within a certain time.
• File and Use Insurers: These insurers need to file their rates with an agency but can start using them right away.
• Use and File: These insurers could use new rates right away but need to file them within a specified time.
• Modified Pre-Approval: These insurers need pre-approval just for changes in rates resulting from the improvement or declining of insurer’s experience.
• Flex Rating Insurers: These need approval to change rates beyond a certain percentage.
• No Filing Insurers: These don’t have to file rates or get approval for them.

States usually have a combination of the laws listed above. However, rating laws could enable state regulators to disallow already-filed rates.

The rating laws discussed above are usually separated into prior-approval and competitive rating laws. The former included every rating law excluding those requiring pre-approved rates.

Prior approval laws for insurance aren’t very common. In fact, a third of states don’t have any such laws. The other states have a mixture of these laws, with business insurance rates being less regulated than those pertaining to personal insurance.

Issues With Prior Approval

Prior approval laws work on the basis that the government needs to decide the adequacy of rates. While state lawmakers are in support of this concept, legislators have seen several issues with such laws.

First, prior approval for all ratings can run up several costs. Both parties (insurers and regulators) need to have extra staff for rates submission, reviewing, etc. If the insurer has business in more than one state, they would have different requirements according to their area. The additional costs would then be recovered by charging insurance buyers higher rates. Hence, prior approval laws actually work to drive up the price of insurance.

On the other extreme, prior approval laws could artificially lower insurance rates. Since regulators seek to limit the insurers’ requested rates, they would delay even natural increases. The result is that insurers suffer financially. When rates do increase, the insurers make a profit again. These fluctuating profits or losses are not good for stability or future planning.

Such laws also lead to a market with declining insurance. If rates are too low to cover insurers’ costs, they would leave the market. New insurers would also be slow to enter. Insurance may hence not be available so easily. Plus, low rates wouldn’t encourage insurers to enhance their service or work on new offerings.

Another issue is the injection of buyers with average-risk getting assigned risk plans. These plans are designed as a last resort for high-risk buyers. However, when insurance becomes scarce, all sorts of buyers get forced into such non-standard risk plans.

Competitive Rating Benefits

Competitive rating laws follow the concept of competition producing rates that are just right. Since the insurance industry is so varied, these laws have been very successful. No one insurance company can become a monopoly due to the sheer size of the industry, so a free market system is a good idea.

These laws give several benefits to buyers of insurance. The first benefit is lowering rates.

Insurers would lower rates themselves when it’s possible, knowing that they can easily raise them in case of any losses. They would also be able to perform better on a financial basis.

With the competition, general liability insurance cost would also remain low and accessible. Insurers would also develop new packages and enhance their services in order to gain more customers. In this manner, assigned risk plans can be operated as required.