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market forces alone are insufficient to prevent market failures. They point out that the fact that state legislatures routinely enact legislation to restrict insurers’ activities regarding pricing and policy form content is evidence that state legislatures do not believe that deregulation will protect consumers from market abuses.

The CEJ and the CFA combined efforts to submit their comments. The CEJ and the CFA encourage the avoidance of euphemisms such as modernization or efficiency when what is sought is deregulation. They encourage the return of the insurance mechanism to its two essential public policy roles—providing businesses and families with essential financial security tools and promoting loss prevention. They warn regulators that techniques commonly used to monitor competition are likely to miss market failures that arise when specific market niches are less likely to be offered quality coverage and/or are being unfairly discriminated against in pricing.

The CEJ and the CFA encourage regulators to analyze personal lines insurance markets as three separate frameworks within an overall framework. They suggest that separate regulatory frameworks be established for policy forms, risk classification and overall rate level. They suggest promulgation of standard policy language for auto and home insurance products to provide a standard product for consumers that allows them to evaluate the product based on the price they are quoted by the insurer without trying to evaluate nuances in coverage levels. Endorsements would be subject to prior approval with a 30-day deemer provision and authority to withdraw approval on prospective basis. They suggest a rigorous review framework for risk classifications. They suggest that the regulator promulgate a list of risk classifications that are required, permitted and prohibited. Other risk classifications that an insurer wished to use would be subject to prior approval with specified criteria in the law. For overall rate level changes, the CEJ and the CFA suggest a file and use system with very limited circumstances where a regulator would have authority to disapprove a filed rate. They suggest that regulators address the blurring of underwriting and rating caused by rating tiers and also encourage regulators to address the issue of regulation of third-party vendors.

The CEJ and the CFA believe that regulators and insurers should be actively involved in promoting beneficial competition. They suggest that states maintain up-to-date web-based price comparisons to help consumers shop for coverage. They suggest that the use of advisory organizations be prohibited and that anti-trust provisions be fully applied to insurers. They argue that promulgation of standardized policy forms by advisory organizations hinders competition, while promulgation of standardized forms by the regulator would promote competition. They encourage the regulator to collect and publish market performance data on insurers in a manner comparable to that contained in the Home Mortgage Disclosure Act.

Consumer advocates have expressed concern that a recommendation for deregulation – couched in terms of moving towards greater reliance on “competition” – would lead to the elimination of critical regulatory protections for consumers. Consumer advocates do not believe that deregulation or unfettered risk classification has benefited most consumers and point to states that have moved to more stringent regulation because of concerns over “open competition.” Consumer advocates do not think that personal lines markets are sufficiently competitive to allow market forces to be the sole protection for consumers.  They point to recent market disruptions in property insurance markets along the eastern and southern coasts as examples.

HOME suggests that insurers are not adequately serving all insurance markets. HOME maintains that the use of certain underwriting guidelines and other market practices combine to create a new form of redlining where the poor, urban residents and people of color are not well served by the insurance industry. HOME suggests that the regulators abandon the notion of determining whether competition exists, as there is not a single marketplace, but many sub-markets within a state or line of business. HOME suggests that insurers be required to provide regulators with data similar to that set forth in the Community Reinvestment Modernization Act of 2001. HOME also encourages publication of the data in a user-friendly form to help consumers, regulators and the industry address market failures. HOME suggests periodic market audits using paired testing to evaluate access to insurance products. HOME agrees that regulatory promulgation of common policy language would make it easier for consumers to shop for insurance. They also suggest periodic evaluation of risk classification factors for disparate impact on protected groups.

Competitive Markets and the Economics of Regulation

To evaluate the prior research regarding competitive markets and the economics of insurance, the Working Group received recommendations regarding a number of academic studies from interested parties. It is important to note that there are studies that support either greater or complete reliance on competitive market forces as the best “regulator” of prices and those that support various forms of price regulation. In forming its opinion regarding appropriate regulatory framework, depending upon characteristics of the market under consideration, the Working Group considered a variety of approaches.

© 2009 National Association of Insurance Commissioners 4

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