Insurance Rating Bureaus - Wagner Flashcards
What were the initial goals of rating bureaus?
- Establish and maintain adequate rates
- Control excessive commissions
- Relieve insurers of making rates separately, reducing expenses
- Create credible rates
Prior to the passage of the McCarran-Ferguson, what was the problem with rating bureaus?
- Insurers owned the bureaus
- Insurers controlled their boards, and
- Insurers dominated their staffs through committees of industry executives that made all pricing and policy form decisions
What was the first known attempt in the U.S. to make fire insurance rates in concert?
The National Board of Fire Ins Underwriters formed in 1866.
• controlled rates and commissions
• terminated agents who did not support and maintain board mandated rates
• they were unsuccessful and disbanded in 1877
How were the local and regional bureaus formed after 1877 different from the National Board Approach?
- focused on insurers’ conduct, rather than agents’
- created compacts between insurers to provide organizational distance between them and the ratemaking function and enforcement activities
- could suspend or reduce rates to meet competition from nonmember insurers to force them to adopt bureau rates or drive them out of the market
- created “stamping offices” to review policy dailies submitted by agents to assure “correctness” of the rate, that the bureau rates were used
What did anti-compact laws do?
• passed by several states to eliminate rating bureaus
• prohibited ratemaking in concert
• were ineffective
- foreign insurers withdrew
- insurers still agreed to rates over dinner
- insurers shunned employees of non complying insurers
The Merritt Committee was formed in NY in 1910 to investigate insurance other than life insurance.
What were the conclusions of the Merritt Committee?
- Fire rate problem was two-fold:
- the making of the rate
- the maintenance of the rate - Insurers should be able to combine since:
- competition brought rate wars
- rate wars were not in the public’s interest - Having bureaus make rates would reduce insurers’ expenses
- Having insurers pool premium and loss information would result in more credible rates
The Merritt Committee provided a rationale for an exception to concept of anti-trust. Several other states conducted investigations
with similar findings.
In 1944, SEUA was indicted for alleged violations of the Sherman Anti-Trust Act. State 6 of the alleged violations.
- fixing premium rates and commissions
- boycotting to force non-members to join conspiracy
- compelled public to buy ins only from SEUA members
- refused non-member insurers access to reinsurance
- disparaged the services and facilities of non-members
- boycotted independent agents who represented non-members
How did Congress react to the SEAU decision?
The SEAU decision overturned the Paul v Virginia finding that insurance was not commerce and therefore not subject to federal
oversight. This left a lot of unanswered questions. The SEAU decision threatened state jobs and revenues and left insurers unfettered by state oversight.
Congress reacted by passing the McCarran-Ferguson Act:
• affirmed state insurance regulation and taxation
• stayed application of the Sherman, the Clayton, the Federal Trade Commission and the Robinson-Patman Acts temporarily
• after that, those acts would apply to the extent that such business was not regulated by the state
• exempted from the stay any agreement or act of boycott, coercion or intimidation that violates the Sherman Act
• affirmed the application to ins of the National Labor Relations, the Fair Labor Standards, and the Merchant Marine Acts
What were the first 2 NAIC all industry model bills?
Why was prior approval required?
In 1946 the NAIC adopted 2 all industry model bills (one for fire insurance and the other for casualty and surety) that required “prior
approval” and applied to all insurers.
Requirement for prior approval:
1. Assured bureaus would be free from federal oversight
2. Appeased bureau stock insurers’ concerns that independent insurers would have advantage
3. Argued for as some lines (e.g. WC and auto liability) had a social purpose
4. Was used by insurers that remained committed to maintaining bureau rates as a fulcrum for limiting competition from independent insurers new to the insurance business.
What were the conclusions of the US Senate Antitrust and Monopoly Subcommittee? (O’Mahoney Committee)
- Lack of Congressional guidance in McCarran-Ferguson as to bureau regulation
- Competition should be the prime regulator of insurance
- Rate setting in concert represented the most serious treat to a competitive market
- Urged state regulators to implement a “file and use” system of rate regulation
Describe the end of bureau rates
End of Bureau Rates
• bureau rates became “advisory rates”
→ insurers could take them or leave them
• later became “prospective advisory loss costs”
→ insurers could develop rates based on expected expenses
→ remains a limited anti-trust issue, however,
→ fosters competition by making the entry/exit of market easy
What changes were made to ISO in the late 1980s?
In 1988, 20 state attorney generals sued the ISO over standardized policy language for commercial general liability.
Consequently, the ISO made the following changes:
1. Majority of board would consist of public members
2. ISO staff began making loss costs without input from industry committees
3. ISO staff became responsible for policy form development, with reliance on outside sources
Why have advisory rating assessments decreased by more than 50%?
Why Advisory Rating Assessments Have Decreased
- Consolidations
- Insurers have option to become independent
- Availability of differing levels of services insurers may purchase
- Savings resulting from technology
How do advisory organizations enhance competition?
- Provide newly formed insurers with assistance in pricing and policy language to enable entry into marketplace
- Assist insurers with small volume of business to continue their presence
- Focus on creation and maintenance of specialty products
Beginning in the mid-1960s, a significant number of states replaced their prior approval laws with less restrictive rating laws. Give three factors that influenced this trend.
- Regulators/states thought less regulation would help the affordability, availability, and particularly lower what were high rates.
- Regulators/states became more interested in solvency monitoring as solvency tools and effectiveness increased. Rate regulation was
not seen as important in maintaining solvency. - Judgments and actions of congressional committees (particularly the O’Mahoney committee) called for/affirmed the practice of rate deviations; the importance of bureau roles substantially diminished.
