Insurance Handbook - Alaska Department of Community and ...

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Auto Regulation
Insurance
Regulation
Insurance is regulated by the individual states. The move to modernize insurance
regulation is being driven in part by the globalization of insurance services.
Some large U.S. companies that operate in other countries support the concept
of a federal system that provides one-stop regulatory approval while others
believe the merits of a state system outweigh the virtues of a single national
regulator. As a result of discussions about the merits of each system, states are
making it easier for insurers to respond quickly to market forces. States monitor
insurance company solvency. One important function related to this is overseeing
rate changes. Rate making is the process of calculating a price to cover the
future cost of insurance claims and expenses, including a margin for profit. To
establish rates, insurers look at past trends and changes in the current environment
that may affect potential losses in the future. Rates are not the same as
premiums. A rate is the price of a given unit of insurance—$2.50 per $1,000
of earthquake coverage, for example. The premium represents the total cost of
many units. If the price to rebuild a house is $150,000, the premium would be
150 x $2.50. Rates vary according to the likelihood and potential size of loss.
Using the example of earthquake insurance, rates would be higher near a fault
line and for a brick house, which is more susceptible to damage, than a frame
one.
While the regulatory processes in each state vary, three principles guide
every state’s rate regulation system: that rates be adequate (to maintain insurance
company solvency), but not excessive (not so high as to lead to exorbitant
profits), nor unfairly discriminatory (price differences must reflect expected
claim and expense differences). Recently, in auto and home insurance, the
twin issues of availability and affordability, which are not explicitly included
in the guiding principles, have been assuming greater importance in regulatory
decisions.
In line with these principles, states have adopted various methods of regulating
insurance rates, which fall roughly into two categories: “prior approval”
and “competitive.” This does not mean there is no competition in states using a
prior approval system. Most approved rates in prior approval states are the rates
used, but in some cases, particularly in commercial coverages, companies compete
at rates below these approved ceilings.
Regulation Modernization
Increasingly, even in the most regulated states, officials are relying on competition
among insurance companies to keep rates down and are modernizing and
I.I.I. Insurance Handbook www.iii.org/insurancehandbook 57