THE INSURANCE INDUSTRY REPORT OF NATIONAL ASSOCIATION OF INSURANCE Rates and Rating Organizations (F1) Subcom. Report The Rates and Rating Organizations (F1) Subcommittee met in the Los Angeles Room of the Century Plaza Hotel, at 9:00 a.m., December 2, 1968. A quorum was present. A tentative draft of the proposed report of the Subcommittee was read and discussed in open session with comments and suggestions from Insurance Commissioners, department staff and representatives of the various insurers and insurer trade associations. The following report was unanimously adopted in executive session. SUMMARY This report is the culmination of an extensive investigation conducted by this Subcommittee. In November, 1965 the Subcommittee decided "to continue its study and review of rates, rating organizations and rating laws; to seek the cooperation of industry to provide answers to specific questions of fact which the Subcommittee, from time to time, would submit to industry at large." The Subcommittee study has been conducted at a number of levels. We have considered rate regulation from the standpoint of the regulators, from the viewpoint of the regulated; through case studies of actual operation of state rating laws, and by analysis of statistical data. In the first phase of its activity the Subcommittee polled all insurance departments concerning attitudes toward rate regulation. Replies to the questionnaire were analyzed by the New York Insurance Department. The analysis is included in the 1966 Report of this Subcommittee. As the second part of its inquiry, the Subcommittee focused on reactions and experiences of representative members of the insurance industry, initiating its study through questionnaires and following them with selected interviews. The Subcommittee utilized especially the facilities and services of the Wisconsin Insurance Department under the direction of Commissioner Robert Haase and his deputy, Stanley Du Rose. Assistance and technical advice were furnished by the staff of the Wisconsin Legislative Council Insurance Laws Revision Committee under the general direction of Dean Spencer L. Kimball of the University of Wisconsin Law School. A questionnaire, prepared with the cooperation of all participants and consultation with selected industry spokesmen, was carefully refined through about six revisions. It produced extensive information from insurers on their experiences with rating laws in 11 states considered representative of the different kinds of rate regulation: all-industry, file and use, no-filing, mandatory-rating bureaus and statepromulgated rates (and some of their varients). Those states included: 1. California: no-filing law (fire and casualty - f & c hereafter - except workmen's compensation for which there is a mandatory-bureau law). 2. Delaware: file-and-use law (f & c). 3. Florida: all-industry law (f & c). (Changed in 1967 to a no-filing law). 4. Kentucky: all-industry law (f & c). 5. Missouri: no-filing law (casualty except workmen's compensation. for which no deviations from bureau rates are permitted); allindustry (fire). 6. New York: all-industry law (f & c). 7. North Carolina: mandatory-bureau law (fire, auto and workmen's compensation). 8. North Dakota: all-industry law (f & c). 9. Ohio: file-and-use law (casualty); all-industry law (fire). 10. Texas: state-promulgated rates (most f & c). 11. Wisconsin: all-industry law (f & c, except workmen's compensation for which there is a mandatory-bureau law). These states also reflect a wide assortment of administrative, geographic, economic and other variables. The first report, one of two prepared by Professor C. Arthur Williams of the University of Minnesota, was adopted by this Subcommittee and presented in June, 1967, at the Boston meeting of the NAIC*. It analyzed types of insurer operations and collated the opinions of insurers on alternative forms of rate regulation and some other basic issues. The second report was considered by the NAIC at its December, 1967 meeting in Hawaii+. That report tabulated detailed information from the insurers on their experiences under the rating laws of the 11 states and their evaluation of the effectiveness of those laws and the manner in which they are being administered. • Report of Rates and Rating Organizations Subcommittee (F1), NAIC Proceedings, 1967 Vol. II, p. 453-80. + Report of Rates and Rating Organizations Subcommittee (F1), NAIC Proceedings, 1968 Vol. I pp. 229-GO. As a culmination of this second phase of the research, hearings of the Subcommittee were held in Chicago, on July 18, 1968, at which questions were asked based on the material developed through the questionnaires. Industry spokesmen were invited to prepare advance written statements, following a prepared outline and commenting on specific questions put to them, and then to testify before members of the Subcommittee. The technical and academic staff of the Wisconsin Insurance Laws Revision Committee helped to draft the outlines, frame the questions, and also participated actively in the hearings. The minutes of the July 18, 1968 hearing in Chicago are Attachment 1 to this report. A summary of the two previous reports is contained in Attachment 2 to this report. Simultaneously with the NAIC-sponsored questionnaires a third avenue of research was conducted by Robert Franson of the University of Michigan and the Wisconsin Insurance Laws Revision staff. He conducted an on-the-scene study of how the all-industry law is actually working in Kentucky. In this venture he received the fullest cooperation of the Kentucky Insurance Department. The results of that study were published as Kentucky Legislative Research Commission Insurance: A Study of the Administration of Kentucky Rating Laws (1968). Additional studies are still under way in other states having differing laws and administration. A summary of Mr. Franson's findings is found in Attachment 3 of this report. During this same time Professor Gerald Hartman of the University of Pennsylvania was preparing a quantitative analysis of loss ratios, the proportion of premiums written through assigned risk plans and other indices to determine the effect of various types of rate regulation upon such variables as rate adequacy, degree of price competition and product innovation. That study was prepared solely for presentation to the American Risk and Insurance Association (ARIA), but was made available to the Subcommittee by Professor Herbert S. Denenberg, who is both an officer of ARIA and a member of the staff of the Wisconsin Insurance Laws Revision Committee. A summary of the report is included as Attachment 4 to this report. CONCLUSIONS The All-Industry laws were devised for an insurance market that was basically non-competitive. Since the enactment of that legislation in the late 1940's, marked changes have occurred in the fire and casualty business. In particular, the competitive setting has changed, bringing with it changes in the availability of insurance. Bureau domination of the rate structures with resulting uniform rates has been replaced by multi-priced rate structures made by insurers functioning independently. The requirement that member companies of Bureau must adhere to bureau rates is being relaxed; member companies can treat the rates as advisory and may deviate from them without permission. Price competition is much more of a factor than it was, although the mix between bureau and independent rates varies from line to line and from state to state. Rate regulation, like all insurance regulation, should be responsive to current conditions in the insurance marketplace. It is the sense of the Subcommittee, therefore, that, where appropriate, reliance be placed upon fair and open competition to produce and maintain reasonable. and competitive prices for insurance coverages wherever such competition exists, thus conserving the resources of insurance departments for other important areas of public interest where there is no substitute for enlightened government action, including increased attention to the growing lack of availability in our personal lines markets sufficient to the demand for such insurance. There can be many degrees of reliance on competition, however, and this Subcommittee does not presume to decide for each state what it should do for one of the advantages of state regulation is that it permits the use of different systems in different states. Specifically, the Subcommittee makes the following recommendations: (1) In states where an increase in competition indicates that a combination of mechanisms for meeting the availability problem and placing of greater reliance on competition in the regulation of rates would be appropriate, we recommend legislation which would, in general, either: (a) authorize the commissioner to suspend the prior approval requirement for any line, subdivision, or class of insurance where conditions warrant such action; or (b) repeal the requirement of prior approval (except for certain unique and specified lines) and replace it with a "no-prior-approval" procedure, under appropriate safeguards including the power in the commissioner to reimpose prior approval for any line, subdivision, or class of insurance in which he finds that competition is insufficient or irresponsible. (c) In conjunction with either (a) or (b) above, strengthen |