Commercial insurance rate deregulation is all the rage; 13 states hopped on the deregulation bandwagon in 1999 alone. The American Insurance Association (AIA) predicts that more states will join in this year, relaxing state control over commercial insurance rates and forms, at least for the largest employers. And the Insurance Research Council's recent survey of firms with sales between $5 million and $100 million revealed that most large employers believe they could save on premiums in a deregulated insurance marketplace.

Under the current regulatory system in most states, insurance companies must obtain approval from the insurance department for any changes in policy rates. Changes to commercial coverage "forms," that is, the actual language and format of the policy, also must be filed with the insurance commissioner. In addition, many state insurance regulations require insurers to market new policy changes in each state where the insurer does business. According to the AIA, that's a cumbersome process that discourages innovation in the commercial insurance market.

Deregulation means that insurance companies no longer must file policy or rate changes with the state, and are not required to market all new products in each state. For the insurers, the burden of multiple state filings is lifted. For policyholders, deregulation brings better insurance products at better prices, says the AIA. With customization, traditional insurance companies can more effectively compete with alternative-risk insurers, banks, self-insurance plans, and offshore captives for their policyholders' attention.

"We've had a lot of success with rate deregulation," says John Marlow of the AIA. "We've had the best experience in states where the commissioner takes a fresh, progressive attitude toward regulation, where they view insurance as a market-based commodity that needs room in terms of innovation and competition. With the financial services act passed in Congress, all sorts of new marketing and product ideas are out there that can be implemented with deregulation."

What's in it for you?

The deregulation of insurance rates and policies can lead to more customized insurance products for the policyholder. In recent years, deregulation has brought lower prices to policyholders, as price competition intensified among insurance companies.

"To date, deregulation has been a one-way street in favor of policyholders," says Robert Hartwig, chief economist at the Insurance Information Institute in New York. "It's been responsible for a price war among commercial insurance companies, but it can be a two-way street. Deregulation implies that just as you can compete for market share by lowering prices, you can raise prices in order to ensure adequate returns."

Under most states' guidelines, the largest commercial policyholders reap the most deregulation benefits, but "large" has no clear definition. The criteria for becoming an "exempt" policyholder (that's exempt from regulation) include: Asset size, number of employees, premium levels, and employment of a full-time, in-house risk manager.

In practice, each state adopting deregulation has a different definition of "exempt policyholder." For instance, in Arkansas, an employer must have total premiums of $250,000 or more, at least 25 full-time employees, and a full-time, in-house certified risk manager or outside broker. But in Pennsylvania, companies that pay at least $25,000 in premiums or have more than 25 employees, and that use an insurance agent or broker to purchase coverage, can buy insurance products that are exempt from rate and form-filing requirements.

Hartwig sees a trend in deregulation of insurance products for ever-smaller companies and predicts that, in the near future, state insurance departments will offer a more uniform approach to deregulation. For now, employers who aren't able to buy deregulated insurance policies still have a host of options, including self-insurance and captive formation (captives are spin-offs of parent companies that insure the risk of the parent company.)

"Small companies can increasingly take advantage of large-deductible policies and plans, and shop around among insurers more readily and easily to find price and types of coverage that they demand," says Hartwig. "They have, right now, insurers eagerly looking to take business and willing to accommodate. Their shopping options have increased, as have actual options for insurance programs."