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 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.
Increasingly, even in the most regulated states, officials are relying on competition among insurance companies to keep rates down and are modernizing and streamlining the rate setting process.
Prior Approval: The insurer must file rates, rules, etc. with state regulators. Depending on the statute, the filing becomes effective when a specified waiting period elapses (if the state regulator does not take specific action on the filing, it is deemed approved automatically) or the state regulator formally approves the filing. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
Modified Prior Approval: This is a hybrid of "prior approval" and "file and use" laws. If the rate revision is based solely on a change in loss experience then "file and use" may apply. However, if the rate revision is based on a change in expense relationships or rate classifications, then "prior approval" may apply. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
Flex Rating: The insurer may increase or decrease a rate within a "flex band," or range, without approval of the state regulator. Generally, either "file and use" or "use and file" provisions apply. Generally, the insurer must file rate increases or decreases that fall outside the established "flex band" with the state regulator for approval. Typically, "prior approval" provisions apply. The "flex band" is set either by statute or by the state regulator. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
File and Use: The insurer must file rates, rules, etc. with the state regulator. The filing becomes effective immediately or on a future date specified by the filer. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
Use and File: The filing becomes effective when used. The insurer must file rates, rules, etc. with the state regulator within a specified time period after first use. A state regulator may disapprove a filing at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
State-Prescribed: The state regulator determines and promulgates the rates, classifications, forms, etc. to which all insurers must adhere. Insurers are usually permitted to deviate from state prescribed rates, classifications, forms, etc., with the approval of the state regulator.
No File/Record Maintenance: The insurer need not file rates, rules, etc. with the state regulator. Rates, rules, etc. become effective when used. The state regulator may periodically examine insurer(s) to ensure compliance with the law.
Generally, there are record maintenance requirements under which insurers must make their rating systems available to the state regulator for examination. A state regulator may order discontinuance of the use of the material at any time if it is not in compliance with the law. The state regulator normally must hold a hearing to establish noncompliance.
As of March 2009
A Brief History of Rate Regulation in the United States: The first law permitting an insurance commissioner to review rates to assure that they were not "excessive, inadequate, or unfairly discriminatory with regards to individuals" was passed in Kansas in 1909. Earlier, toward the end of the 19th century, price wars and a scramble for short-term revenues at the expense of more conservative actuarially based policies had caused many insolvencies, leaving policyholders without coverage. In the wake of these insolvencies, the insurance industry formed compacts designed to promote "correct pricing practices," but the compacts proved unpopular and were abandoned. State control of rates was seen as a better solution to the problem of potentially destructive price wars than a system of compacts largely beyond public control.
In 1914, the U.S. Supreme Court (German Alliance Ins. Co. v. Lewis, 233 U.S.389) articulated the rationale for closely regulating the business of insurance. In the Court's opinion, insurance was a business "affected with a public interest," first because insurance is often a legal or contractual prerequisite for other market activity and second because the complexity of the insurance contract places the average consumer at a comparative disadvantage in the marketplace. This ruling served as the justification and impetus for increased state regulation.
In 1921, the National Convention of Insurance Commissioners (NAIC) adopted the "1921 Standard Profit Formula", which acted as a guide to regulators in determining the "proper" balance between rates that are sufficient to assure solvency yet low enough to prevent excessive profits. This formula, the first attempt by regulators to specifically define the meaning of "adequate but not excessive" rates, called for a 5 percent underwriting margin (investment income was not to be taken into account).
Throughout the first half of the 20th century the adoption of rate regulatory statutes in the United States continued to grow. By 1944, all but three states had statutes designed to control insurance rates. In 33 of these states, a formal mechanism was in place, which, at a minimum, provided for routine review of rates by the commissioner.
Following the passage of the McCarran-Ferguson Act in 1945, which explicitly provided for state regulation of the business of insurance, the NAIC adopted the "All-Industry" model statutes, which explicitly set out the principles that guide every state's system of rate regulation. These statutes called for a bureau-rate prior approval system and by 1955 most states had adopted such statutes. There was one significant exception to this trend. California never adopted the "All-Industry" model statute. It adopted a "no filing" system, a strongly competitive system of rate regulation which would prove to be a testing ground for the subsequent use of competitive systems in other states. Later, Illinois, which had originally enacted a prior approval law, subsequently (1971) allowed it to sunset in the belief that the best system of rate regulation is the marketplace.
The Illinois system of open competition appears to be working well. Data on auto insurance nationwide consistently show that auto insurance expenditures in Illinois are close to the nationwide average. While not subject to approval or disapproval of the insurance commissioner, rates in Illinois for auto insurance, homeowners insurance and a few other insurance coverages must be filed for informational purposes. Rates for medical malpractice and workers compensation are regulated under a use and file rule.
The general trend toward deregulation in the United States during the 1960s and 1970s extended to the insurance industry and the California experience was often cited as an example of the effectiveness of competitive rate regulation. In 1980, the NAIC adopted its first model statute for a competitive rating system and by 1984 varying forms of competitive rating were operative in 25 states. This constituted a major shift in the way the business of insurance was regulated in the United States.
Now, the insurance industry is on the cusp of much broader regulatory change that has the potential to alter the structure of insurance regulation again. The impetus for this change comes in part from the globalization of financial services, which is the driving force behind international efforts to create greater uniformity in many areas including accounting and solvency. Europe’s Solvency ll, regulatory requirements designed to facilitate the creation of a single market for insurance services in the European Union, is part of this trend. In addition, the crisis in financial services is pushing legislators and regulators to reexamine the entire financial services regulatory system.
Prior Approval vs. Open Competition:
Currently, there are seven different types of rate regulation systems, with "no filing/record maintenance" being the most competitive, see chart and explanation of the various systems at the end of this report. The rate regulation process may vary for different kinds of insurance within the same jurisdiction, and states may change the method used to oversee rates for a given kind of insurance if market conditions appear to warrant such a move.
The commissioner generally reserves the right to disallow rate filings within a certain period of time if they are deemed inconsistent with the principles of rate regulation. In the event that a rate change is disallowed, the new rate must be discontinued and adjustments made in policyholders' premiums to reflect the difference between the new and old filings, unless filings are not required.
Maintaining a Proper Balance: Traditionally, regulators have been guided by the general goals of insurance regulation set out in state statutes that charge them with two duties: 1) preserving the long-term solvency of insurance companies and 2) protecting insurance consumers from unfair and inequitable treatment. This precept would include protection against excessive rates and unfair rate discrimination (where the difference in premiums between groups of policyholders is not commensurate with cost differences).
Maintaining a balance between two seemingly conflicting concerns, adequacy and fairness, is beneficial to both consumers and insurers.
Consumers benefit from rate adequacy to the extent that they are protected from the loss of value that a policy suffers when an insurer's financial ability to pay future claims is in doubt. They also benefit from rates that are not excessive. Insurance companies benefit from rate adequacy in that revenues will be sufficient to assure long-term solvency. Excessive rates would also be to insurers' detriment in that consumers would increasingly choose alternatives, such as self-insurance. Regulators seek to achieve this balance differently under different regulatory systems. Competitive systems, which rely on market forces to set rates, implicitly assume that the insurance industry is sufficiently competitive that no firm will charge excessive rates, lest it lose market share, or inadequate rates, lest it jeopardize its financial health. Prior approval systems, on the other hand, assume the state must intervene to ensure a balance between adequate and excessive rates.
Under an active price control system, such as prior approval, this balance may be difficult, if not impossible to maintain. For example, political pressures to provide low-cost insurance may lead to a tendency toward inadequacy, leading insurers to withdraw from the marketplace, which in turn leads to affordability and availability problems. Regulatory lag, the extra time required for prior approval to react to changes in supply and demand, has been shown to affect the balance issue since it causes inadequate rates in times of high inflation and excessive rates during deflation periods.
Affordability and Availability:
Though not explicitly set out in statutes, regulation has become increasingly concerned with issues of affordability and availability of insurance. These goals are difficult to pursue since what is considered affordable is a value judgment based upon lifestyle as well as income. In addition, the pursuit of these two goals may jeopardize achievement of the two others: adequacy and fairness.
States have addressed concerns that insurance be affordable and available in many different ways. These include rate caps and creation of cross-subsidies between different risk classes through limitations on rating variables, such as territory in the case of auto insurance.
One of the most common methods of dealing with insurance availability problems in lines such as auto, property, workers compensation and medical malpractice, has been the use of state-created “residual risk pools.” These mechanisms, which are complex and vary greatly from state to state and by line of insurance, are intended to be an insurer of last resort for those who have been rejected by standard market insurers (these individuals are known as “residual risks”). Although the specific operating structure of each pool may differ, all are based on a common concept: any insurer providing that particular line of insurance must share the profits or losses of insuring residual risks.
The size of residual risk pools is typically considered an indicator of the degree of rate inadequacy in the voluntary market. Since insurance companies generally will accept applicants for whom rates are commensurate with the risk to be assumed, the greater the inadequacy the greater the likelihood that the applicant will be rejected for coverage. Applicants rejected by the voluntary market may apply to the residual market where acceptance is usually contingent upon proof of inability to obtain coverage in the voluntary market, with some pools requiring evidence of rejection from two or three companies.
In the 1980s, losses in some of these residual markets systems reached exceedingly high levels. This led states to consider making such risk pools more self-sufficient by charging higher rates to those who impose high costs on the system. This trend highlights the fact that inadequate rates are not sustainable in the long run. An additional problem in workers compensation is that the burden of the residual market assessments can push up rates in the voluntary market, encouraging large employers with the financial resources to self-insure to do so. The number of policyholders insured in residual markets has been steadily dropping in most states for most types of insurance as prices have risen to more closely reflect losses and other changes in its system bring more high-risk policyholders into the voluntary markets.
Also in the 1980s, to further the regulatory goal of affordability, some states enacted excess profit laws that limit the amount of profit a company can make in a particular line of business. Seven states now have excess profit laws in their books. These statutes vary widely regarding the lines of insurance to which the law applies and the way excess profits are computed. In South Carolina, for example, the statutes apply to all lines of property/casualty insurance. In Michigan and Rhode Island, they apply only to workers compensation and in California, New Jersey and New York only to personal auto insurance. In Florida, they apply to both workers compensation and auto insurance. The formula for computing excess profits generally takes into account the three most recent calendar years but the "trigger" for determining whether profits are excessive varies among states and by line. In one state, the law may be activated when operating income, which includes investment income, exceeds a certain percentage of earned premium. In another, the trigger may be underwriting income. In some states, insurance companies are required to refund to policyholders any amounts deemed "excessive." In 2003, New Jersey extended the time period for calculating excess profits from three to seven years.
Deregulation of Commercial Insurance for Large Policyholders: Over the past decade, brokers and insurers that handle the insurance needs of large commercial entities have pushed for a simpler regulatory system that would reduce the inefficiencies inherent in dealing with the rules and regulations of 51 jurisdictions. Initially, they favored federal regulation. However, states are now more receptive to the idea of rate deregulation for large industrial corporations, which, unlike many individual consumers, have the expertise to compare complex contracts and pricing schemes. Brokers maintain that the cost of complying with multistate laws is pushing these companies to seek coverage offshore in places such as Bermuda where there is far less regulation.
In March 2002, the National Association of Insurance Commissioners approved a model law to minimize oversight of commercial insurers’ rate changes. Under the model, regulation of commercial lines rates falls under the use and file classification, meaning that insurers can begin to use new rates 30 days after filing with regulators.
Many states have gone further. Since the deregulation movement began, more than half of the states have passed laws that deregulate commercial insurance policy forms and/or rates. The changes are designed to allow traditional insurers to better compete with captives and others in the alternative market as well as insurers abroad and to offer customized, innovative products to an individual commercial client. This has been difficult to do since up to now most states have required companies to file products with their state insurance department and market the products in all states in which they do business.
States differ greatly on the extent of deregulation. In most states, to come under the large commercial risk umbrella, commercial entities must meet at least two of a list of criteria that establish their size and sophistication as insurance buyers, but the range in size varies from state to state.
In Arkansas, for example, the state no longer oversees any commercial property/casualty insurance rates, with the exception of workers compensation, and employers and professional liability insurance. Large commercial firms — defined as those that pay premiums of $250,000 or more — can negotiate the details of the policies they purchase. To qualify as a "large commercial risk" in Arkansas, in addition to the $250,000 premium level, a firm must also have at least 25 employees and a full-time certified risk manager. (A risk manager is a specialist who is responsible for identifying and reducing the firm's likelihood of accidental loss and for buying insurance.) Some states, such as Pennsylvania, put the premium threshold at $25,000; in Oklahoma it is $10,000, among the lowest for states that have set premium thresholds.
Proposition 103: Proposition 103, the 1988 California ballot initiative which passed by a small margin of 51 to 49 percent, called for all insurance rates to be rolled back by 20 percent below November 1987 levels. It also changed the state's long standing competitive rating law to prior approval, granted an additional 20 percent discount to good drivers (drivers with no more than one conviction for a moving violation) and changed the basis for computing auto insurance premiums, placing greater reliance on driving records than on geographical location.
On May 4, 1989, the California Supreme Court, responding to a suit filed by leading insurers and insurance organizations, upheld most sections of Proposition 103, including the rate rollback. However, it found the insolvency standard, which granted relief from the rate rollback only if an insurer was "substantially threatened with insolvency," violated the due process clauses of both state and federal constitutions. The court ruled that insurers are entitled to a "fair and reasonable" return, a concept that was subject to much judicial and regulatory scrutiny over the years as the appropriate standard for rate rollback refunds was fought out in the courts.
On August 18, 1994, after many legal battles, the California State Supreme Court affirmed the authority of John Garamendi, the insurance commissioner at the time, to apply a single industrywide, public utility-type standard in calculating how much each company's rebate to consumers under Proposition 103 should be. The rate rollback standard was based on a 10 percent maximum rate of return, the industrywide average during the 1980s, as measured against a "reasonable" cost of providing insurance.
In its opinion, the court said that the commissioner's ratemaking formula could not be deemed arbitrary, discriminatory or confiscatory as applied in general or specifically to 20th Century, the insurance company that had challenged the commissioner's formula. Citing public utility cases, the court said that for the formula to be confiscatory it would "require deep financial hardship," meaning the inability of the regulated firm to operate successfully. As a result, it said, the rollback regulations do not violate the Fifth Amendment to the U.S. Constitution, which prohibits the taking of private property without just compensation—in this case, taking by the government through price controls. Furthermore, said Justice Mosk, who wrote the court's opinion and also added one of his own, insurers could have withdrawn from the market after the initiative was passed, and some did. Since those who stayed voluntarily subjected themselves to price regulation, "there can be no taking," he said.
The passage of Proposition 103 marked the first time that changes in the rate setting process have been dictated by a voter initiative. Proposition 103 was brought about in part by the high cost of auto insurance in some parts of the state and an affordability problem in some inner city areas. It followed many unsuccessful attempts by legislators to enact legislation that would have lowered the cost of auto insurance.
Rating Factors: Auto Insurance: Under current federal and most state laws, insurance companies are permitted to set rates according to factors that are actuarially validated predictors of risk. Among the many traditional variables considered in setting auto insurance rates are gender, age and the geographical location of the vehicle to be insured. However, since the 1970s various groups have been challenging these rate setting practices on the basis of unfair discrimination and social equity. The first factors to be challenged were those outside the control of individual policyholders' age, sex and marital status. Rate classifications based on age and gender are prohibited by law in Hawaii, North Carolina and Massachusetts. Laws that reduce reliance on gender and ban age consideration have been passed in California. Michigan and Montana prohibit the use of rate classifications based on sex and marital status and Pennsylvania prohibits the use of gender. Bills that would ban gender-based rating have been considered and rejected in a number of other states.
More recently, rating by geographical area, or "territory," has come under attack, largely because many low-income drivers live in central city areas, which, due to traffic and road conditions, tend to have high accident rates and therefore higher than average auto insurance rates. In California, for example, auto insurance rate regulations now require territory to be assigned a relatively low weight relative to its actual importance as a risk determinant.
Territorial rating is used in every state in the development of auto insurance rates. Territories must be approved by the states' insurance department prior to their use in rating. In collecting data to set rates for a territory, claim data is aggregated using the "principal" garage rule, under which all losses are tagged geographically according to where the drivers' car is garaged.
Critics of traditional auto insurance rating factors argue that rates should reflect driving habits over which each policyholder has some control. In their drive to eliminate age, sex and territory as rating factors, critics have tended to ignore the fact that premiums already are based in large part on individual driving habits — driving experience, traffic violations, at-fault accidents and the number of miles a vehicle is driven each year. Studies have shown that individual rating factors have the greatest effect on a driver's premium.
Some groups say that annual miles driven is the most important predictor of crash losses and that premiums should reflect this factor to a greater degree. In addition, proponents claim, people who drive fewer than average miles per year would benefit from having their premium computed based on the miles they actually drive.
Premiums can be made to reflect driving history to a greater degree by incorporating credits and debits into premium calculations over a longer period of time, thus increasing incentives to drive safely. A system in Massachusetts, set up in 1990, is based on this concept, which is widely used in European auto insurance systems. To provide greater rewards for safe driving, the state devised a system that will ultimately grant premium credits for each accident-free year and impose surcharges for accidents, over a 15-year period.
While some lawmakers are responding to the problem of high auto insurance rates by placing a greater emphasis on individual driving records, others have attempted to make insurance more affordable by flattening out rates so that those in the highest rate categories are subsidized by those in lowest. There are problems with both approaches. The first will increase the already high rates of drivers with poor driving records, to the point where some will drive without insurance, thus forcing others to bear the cost their accidents. The second creates market disruptions as insurers that are required to sell insurance below cost seek to deal with the effects of such regulations. Neither deals with the problem of how to stabilize the underlying costs that push insurance premiums up or with issues related to mandatory insurance, such as the amount and what type of coverage, if any, should be compulsory.
Territorial Rating: Insurance prices are based on the expectation of loss. Insurance company data showing auto accident losses by geographic location are used to establish rating territories. These are areas ranging in size from a few square miles to a portion of a state, where losses are basically the same. The territorial rating system helps set equitable rates.
Rates for auto insurance tend to be higher in urban areas because there is more traffic congestion in cities, and in older cities the roads may not have been laid out with the automobile in mind. Crime may also be higher in urban centers, raising comprehensive coverage prices. Because low-income drivers tend to be concentrated in cities, over time various states have experimented with programs that effectively subsidized auto insurance for drivers living in such areas. Thus, people living outside the cities paid more than they should, based on their territory, while people living in urban areas paid less. This can lead to a competitive disadvantage for insurers with large numbers of urban policyholders whose policies are subsidized by its non-urban business. Insurers with fewer urban customers may be able to offer lower prices.
Actuarial studies have found that territory is the most predictive of risk and driving record among the least because the average driver has so few claims in his or her lifetime. In Connecticut, for example, studies conducted for the Insurance Association of Connecticut show the average policyholder has only one bodily injury claim every 77 years, one property damage liability claim every 24 years, one comprehensive claim every 13 years and one collision claim every 15 years. Costs vary by territory. There is a more than two-to-one difference in liability and physical damage losses per insured car between New Haven, a high-risk territory, and the lowest risk territories, such as New London. The state already requires some subsidization of urban drivers’ rates due to an administrative ruling that limits the impact of territorial rating.
In California, territorial rating was banned for a while. However, in December 2000, a state appeals court overturned a lower court decision that insurers may not use ZIP codes to set auto insurance rates. The ruling was based on the court's interpretation of Proposition 103, the 1988 ballot initiative. Proposition 103 provisions require that insurers first consider three factors. They are: the policyholder's driving record; the number of miles driven each year; and the extent of that individual's driving experience. The insurance department added 14 optional factors that insurers may consider, including gender and marital status but not age. The appellate court characterized the initiative as contradictory, saying that the law requires the insurance commissioner to protect drivers from arbitrary rates but, at the same time, requires rates to be based on a person's driving history. Safety record, miles driven and driving experience are not as critical in assessing potential losses as where the driver lives, the court said. Thus, any agency implementing the law must attempt to reconcile these conflicting demands. However, in 2006, largely in response to a petition filed by the cities of Los Angeles, Oakland and San Francisco, an auto insurance rating system went into effect that relied less on territory and thus reduced rates for urban drivers.
A comparison between the cost of claims in Brooklyn, New York, a section of New York City, and other parts of the state provide dramatic evidence of the difference between highly urbanized areas and more rural communities. The disparity is most apparent in liability and personal injury protection (PIP) coverages. For example, over the period 1998 to 2000, Brooklyn’s liability and PIP costs were almost three times greater than the statewide norm, according to industry data ($1,435 v. $511) and almost five times as higher than those for Albany. Among the explanations for this cost differential are higher traffic density, more theft, higher medical care fees and differences in claim behavior. In Brooklyn, for every 100 property damage claims there were 104 injury claims, compared with 31.1 for Albany and 48.8 for the state as a whole, suggesting that some of these claims may be fraudulent, according to some industry observers. Motorists in Brooklyn were almost 75 percent more likely to file liability claims than people living elsewhere in the state.
Rating Factors: Property Insurance: Territorial rating also is used in property insurance. In California, for example, communities vulnerable to brush fires pay more for fire insurance than people in identical homes in less fire-prone parts of the state. Homeowners and business owners in inner city areas where the risk of fire and burglary is higher than average, also pay a higher rate. In states with regions that are vulnerable to weather-related disasters, such as hail and windstorms, territorial rating helps ensure that insurers actively compete for business in all parts of the state, not just in the areas with the lowest risk of storm or hail damage. All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available, see also paper on Urban Insurance Issues.
The Use of Credit Reports: A federal law, the Fair Credit Reporting Act of 1970, allows for the use of credit reports in five situations, one of which is insurance underwriting. While the law itself does not define underwriting, the Federal Trade Commission interprets underwriting to include determining an applicant's eligibility for insurance. The law was reauthorized by passage in 2003 of the Fair and Accurate Credit Transactions Act.
Insurers have historically believed that there is a direct relationship between financial stability and risk. Credit reports, which show how a company or individual handles debt, have been used for years in commercial underwriting since firms that are in financial trouble are more likely than financially sound companies to skimp on maintenance and safety and to commit fraud. A few years ago, insurers began to use insurance scores based on credit reports to underwrite new auto insurance policies. Generally insurers do not receive a policyholder's credit report. They purchase an insurance scoring product from a vendor. These are used for personal auto and homeowners underwriting on the grounds that a good credit history implies a responsible attitude and that such people tend to be more careful, see report on Credit Scoring. Research has shown that elements in a person's credit history provides a strong indication of the likelihood of insurance loss.
Pay-As-You-Drive Auto Insurance Rates: Some insurers are experimenting with mile-based auto insurance policies in order to reduce the amount of driving and pollution. Others see such programs where mileage and driving behavior is monitored by satellite as a method to make rates charged more reflective of the actual risk. (Under a regular policy, drivers pay for six months or a year of coverage, regardless of how much the car insured is driven.) Texas approved amendments to its rules to enable insurers to sell such policies, effective February 2002, and Oregon has shown an interest in developing the concept. In a pilot program in Texas, one insurance company experimented with using a global positioning satellite to monitor mileage, but the expense of such a device may make the cost of such a program prohibitive. Other insurers have initiated programs to test feasibility and demand. Increasingly, states are examining how auto insurance rates can be made more reflective of miles driven.
Rate Making Organizations: Reacting to pressure to limit insurers' antitrust exemptions, rate-making organizations such as the Insurance Services Office (ISO), are providing participating insurance companies with advisory average prospective loss costs rather than advisory rates as they once did. Advisory average prospective loss costs are estimates of future claim payments, including such costs as claims handling and legal defense. Advisory rates contain provisions for various expenses, contingencies and a profit. The National Council on Compensation Insurance has also adopted a loss cost approach to filing rates for workers compensation. In addition, the ISO Board of Directors is now controlled by individuals who are associated with the insurance industry but are not members of major insurance companies.