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Detail Outline for Exam 7 – 2007 Part C - page 17 / 28

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Bartlett, "Attempts to Socialize Insurance Costs in Voluntary Insurance Markets: The Historical Record," Journal of Insurance Regulation – SK

Changes in Blues Practices

Groups w/ more favorable experience began leaving Blues.

Competitive forces caused Blues to begin experience rating.

Regulatory Constraints

Territorial Constraints on Auto Insurance Rates

Socialization of Property-Liability Insurance Costs – attempts include regulatory restrictions on class rate relativities, banning use of certain U/W-ing criteria, residual markets.  These mainly affect WC, personal auto and dwelling insurance.

Michigan’s Essential Insurance Act – an effort to limit geographical differences in auto and HO insurance.

Effective in 1981, this imposed:

1. An insurer could not have more than 20 differential territorial base rates.

2. An insurer’s lowest base rate couldn’t be less than 45% of its highest.

3. For adjacent territories, rate of lower-rated could not be less than 90% of the higher-rated.

It also required insurers to accept all eligible.  And prohibited the use of gender/marital status in rating.  At the same time, MI moved from prior approval to file-and-use.

Auto insurance was considered to be essential, since auto owners were required to purchase it and because MI had one of the most stringent no-fault laws.

Also, there appeared to be unfair discrimination against Detroit.

In 1986, the rating constraints were suspended and replaced by an alternate approach: premiums collected in Detroit were not allowed to increase more than 4% + CPI changes in any 12-mth period.

In 1991, the 1986 laws sunset – thus reinstating original restrictions.

In 1996, Republicans repealed the restrictions.

Territorial Rating and Marketing

Effects of the EIA – analyses show that central Detroit received substantial cross subsidies.

Assessment of Territorial Rating Restrictions – resulted in market-skewing and availability problems.

Conclusions

Rejda, "Financing the Social Security Program," Social Insurance & Economic SecuritySK (1999)

Financing Principles

Partial-Reserve Financing – 3 alternatives to consider:

current-cost financing: pay-as-you-go, plus a relatively small contingency fund.  There is no prepayment and no large reserve fund.

full-reserve financing: fully funded – a prepayment system of financing.  The dollar amt of all payments into the fund plus investment income should cover all guaranteed/promised benefits.

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