allowed insurers to adjust their rates to fit the overall economic conditions of the state or area. As long as the rate had a sound actuarial basis, the insurers were allowed to compete for business.
An interesting and significant development occurred in 1972. The rating law in Illinois contained a sunset. A political squabble developed in the Illinois legislature and the legislature adjourned without reaching a compromise on the rating law. The rating law was allowed to sunset, which led to a novel unintended experiment of a state without a rating law or any rate standards for property and casualty insurance products. Although it can no longer be viewed as unintended, Illinois has operated since 1972 without a rating law. This environment led to the development of the market conduct examination and the introduction of the Market Conduct Annual Statement. It should be noted, however, that Illinois continues to review policy forms and reviews rates for unfair trade practices.
Another significant regulatory development occurred in 1988 when voters in California approved Proposition 103 to replace the “open-competition” regulatory framework with prior approval of rates and risk classifications. Some of the most significant provisions of Proposition 103 were limitations on automobile insurance risk classifications, including the requirement that driving record, years of driving experience and miles driven have the greatest weight in determining a consumer’s premium—greater weight, for example, than rating territory. Proposition 103 has survived extensive legal challenges.
In the early 1980s, the NAIC adopted model laws containing “file and use” and “use and file” concepts. The “file and use” concept allowed an insurer to introduce rates into the market at the same time they were being filed with the insurance regulator. The “use and file” process allowed the insurer to introduce rates into the marketplace and, at a specified later date, file them with the regulator. Variations between states in the details and the application of such principles were common, however, and these variations make it difficult to group states by their type of rating law and make comparisons.
In the late 1980s, a number of state attorneys general brought legal action against the Insurance Services Office (ISO) alleging its involvement in anticompetitive activities. ISO settled this litigation by changing its corporate structure and going to loss costs in states and for lines where it had not already done so. The NAIC response to this matter included the formation of a working group in January 1989. The working group was charged with the task of reviewing the practice of rating organizations providing fully developed rates, including expense and profit loadings, to their member insurers. By the early 1990s, as a result of this work and of the ISO settlement, a much larger number of states had enacted legislation or adopted regulations or procedures to accommodate and/or require such organizations to file prospective loss costs instead of fully developed rates. At this time “rating organizations” became more widely referred to as “advisory organizations,” with the expectation – both by regulators and insurers – that they would now assume even more of an advisory role and should not be allowed to encourage or coordinate concerted action by insurers. Advisory organizations continue to develop loss costs, policy forms and risk classifications that may be used by insurer members of the organizations.
During the development of this document, one common theme was apparent from comments received from representatives of the insurance industry. They all encouraged reliance on market forces rather than government officials with regard to the development of insurance products and their corresponding prices. In other words, industry representatives are encouraging state insurance regulators to abandon rate regulation and review of policy form language before policies are sold. With respect to rates, they prefer a system like the Illinois system that has been in place since 1972.
Insurer representatives state that they do not ask for a system without any regulation. They encourage the development of a regulatory framework where regulators monitor insurers for solvency and review insurers’ conduct in the marketplace. They seek the same regulatory framework from every state with clear and unambiguous regulatory standards so that they know in advance how their market performance will be measured.
The AIA comments stress four guiding principles that they believe are essential. First is market regulation of rates and policy forms with reliance on consumers to drive marketplace pricing and selection of appropriate coverage forms. Second is for insurance regulators to concentrate on protecting consumers through monitoring financial integrity and market conduct of insurers. The third AIA principle relates to regulatory uniformity. They stress that regulation should be uniform and
consistent across jurisdictional boundaries. Finally, the AIA asks for clear and unambiguous regulatory standards. In support of its position, AIA cites many academic experts including J. David Cummins, editor of Deregulating Property Liability Insurance, Restoring Competition and Increasing Market Efficiency, AEI-Brookings (2002), who wrote: “The time has come to deregulate prices in the personal lines of property-liability insurance. In the long run, price regulation does not result in lower prices for consumers, but it can cause serious economic inefficiencies that destabilize insurance markets and ultimately
© 2009 National Association of Insurance Commissioners 2