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increase the price of insurance.”

According to the AIA, recent developments in risk classification have resulted in more accurate risk assessments, rating systems and underwriting practices that enable many companies to offer coverage to virtually every applicant, assuming no extraordinary catastrophe exposure. The AIA views these more accurate, individually tailored rating and underwriting systems as improvements to older risk classification systems that relied more heavily on larger groupings. The AIA asserts that the result in many markets is fewer assigned risk policyholders, more choices for consumers and lower residual market populations. The AIA notes that these risk classifications are already subject to anti-discrimination laws and are reviewed for compliance with those laws by state insurance departments. According to the AIA, further regulation is neither appropriate under these laws nor would it be beneficial for consumers. The AIA asserts that further limitations would harm good risks by requiring them to pay more than they should, create unfair subsidies for higher risks and reduce competition. It is the AIA’s view that such additional regulation would be the opposite of modernization.

The PCI and NAMIC combined efforts and engaged former Illinois Insurance Director Phillip R. O’Connor, Ph.D. to provide comments on their behalf. Mr. O’Connor provided his perspective on insurance underwriting cycles and the laws of supply and demand as they pertain to insurance. He suggested that there is no basis for believing that rate regulation delivers any cognizable benefits to the insurance public. He said that research suggests that reliance on competition and market forces yields benefits to consumers. He points to evidence that the Illinois system works such as low residual market participation, easy access to the market by consumers, high levels of market participation by insurers and little political controversy about insurance. He observes that, on the contrary, anecdotal information concerning turmoil in Massachusetts and New Jersey, when those states had strict rate regulation, is instructive regarding rate regulation.

Mr. O’Connor suggests that the main support for continuing rate regulation comes in three forms: inertia; concerns that reliance on competition devalues insurance regulation; and ideological disposition by some that competition is suspect. He advocates four points for modernizing insurance regulation:

Presume a competitive market unless proven on a statewide basis to be non-competitive and then any rate intervention should be minimal;

Findings of non-competition and continued rate intervention should be short-term and requiring justification for extension;

Policy form standards, if any, should encourage flexibility and innovation while confining restrictions to essential prohibitions or coverage standards; and

Policy forms could take effect upon filing on the condition that the policy could be found to be non-conforming at any future time and subjected to withdrawal and/or interpretation in a conforming manner.

State Farm maintains that the market in the United States for personal auto and homeowners is intensely competitive. It maintains that there are a large number of firms selling similar products and that seller concentration is relatively low. It adds that market entry is relatively easy and that there is significant price competition. State Farm encourages enactment of rating laws that rely on competition to assure reasonable prices rather than on laws requiring regulatory approval of rate changes and oversight of the details of ratemaking. It encourages the adoption by all states of an Illinois-style rating law. It believes that rate review and approval systems impede competition, thereby harming consumers and giving rise to calls for federal legislation to preempt state insurance rate regulation. It also suggests that the NAIC endorse the elimination of policy form filing requirements. It believes that a self-certification system like that employed in Colorado would be sufficient to protect insurance consumers.

State Farm hired former District of Columbia Insurance Commissioner Larry Mirel to supplement its comments. Mr. Mirel provided evidence and cited several studies to answer two basic questions. First, do rating laws keep consumer prices down?

Second, does the partial exemption of insurers from federal anti-trust laws result in market restriction or price collusion? Mr. Mirel’s answer to both questions was no. He encouraged the working group to look at the fundamental question of whether regulators should be in the business of setting or controlling prices for personal lines products. He suggested that absent a strong case that price regulation is necessary to protect consumers and that purchasers of insurance are better off in jurisdictions that control prices, the NAIC should favor the repeal of rating laws.

Perspectives of Consumer Representatives

Consumer representatives have a different view on the regulation of rates and policy form language. They maintain that

© 2009 National Association of Insurance Commissioners 3

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