Insurance Experience and Rating Laws

Abstract

This paper compares several insurance experience variables under two major types of rating laws for five kinds of insurance in eleven states. Two major purposes of the article are to attempt to validate insurer opinions about rate regulation in these states and to help fill an empirical gap in the literature on the subject. For comparative purposes, t:he rating laws were classified as either (1) can use before filing, or (2) cannot use before filing. Although rate levels appear to have been more adequate in the CU states, it is dangerous to generalize as to the degree to which this would be true if more states were included in this category. Differences among individual states within the CNU group were considerably greater than those between the averages for the two groups of states. Thus it appears that the administration of the rating laws and other factors may be more significant than the type of law, per se. Nonetheless, the CU states generally had lower percentages of assigned risk premiums, less market penetration for major bureau affiliates, but greater overall market concentration and receptiveness to product innovation. With the trend to more liberal rating laws, the regulator's prime concem may be the prevention of monopolies. Representatives of fire and casualty insurers frequently have maintained that Gerald R. Hartman, Ph.D., F.C.A.S., C.P.C.U., C.L.U., is Associate Professor of Insurance at Temple University. This paper was submitted in February, 1969. The author wishes to acknowledge the support of the Cooperative League of the United States of America, including the folowing companies: Desjardins Mutual Life Insurance Company, Mutual Service Insurance Company, Cooperators Insurance Association, Co-operative Insurance Services, Ltd., La Societe d'Assurance des Caisses Populaires, Nationwide Insurance Company, and Leaguie Life Insurance Company. In addition, he desires to express his gratitude to the National Bureau of Casualty Underwriters, the Insurance Company of North America, the National Association of Independent Insurers and the University of Pennsylvania for their help with this study. The author acknowledges the computational assistance provided by Ed Rappaport, Tom Beam and Paul Eldridge, graduate students at the University of Pennsylvania. Finally, he expresses his appreciation to the State Insurance Departments that responded to his questionnaire and provided additional information as it was reauested. the type of rate regulatory law is a major determinant of insurance underwriting experience. Most persons familiar with the operation of rate regulation in the United States probably would concur, at first blush, with this view. There are so many factors which affect underwriting results, however, that after further reflection upon the subject one may wonder whether the type of rate regulatory law is a major determinant of undervriting results. Underwriting losses, especially in automobile liability insurance, have been attributed to the fact that insurance rates generally require prior approval by insurance departments before they may be used. Yet, to the writer's knowledge, only Mark Kai-Kee of the California Insurance Department has published data which specifically relate rating laws and underwriting results. Mr. Kai-Kee compared California and countywide loss ratios to