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Commercial insurance rate deregulation applauded by many states

Commercial insurance rate deregulation has been steadily growing since the beginning of the movement in the 1970’s.  Insurance deregulation has slowly but surely been taking hold in the United States, with more and more states rejecting heavy state regulation.  Currently, more than half the states have elected to eliminate this regulation, and have adopted reform legislation that allows large insurers more freedom in setting insurance rates.

The Insurance Information Institute (III) defines insurance deregulation as the act of “in insurance, reducing regulatory rates and forms.”  This also means that insurance companies do not need to file policy or rate changes with the state, and do not need to market all new products in each state. The III reports that deregulation legislation is available in two forms: The Dual Insurance Charter and the SMART Act.  

The former is a dual chartering system that would allow the company to choose between the state system, and a national regulatory system and the latter legislates reform of the state system, putting into effect a system that would unify standards and settle disputes within the state.  Large insurers tend to support the modernization and reform of the state system.  The passage of the Gramm-Leach-Bliley Act in 1999 ensured that insurance activities would be regulated by the states, but it also paved the way toward reform of state regulation.

"Ultimately, rate deregulation was successful in virtually every area of the economy in which it was tried. Indeed it is difficult to think of a policy idea that has had such complete success in the real world"

State insurance rate regulation is the conscience that sets rules and ensures that the industry obeys them.  Rate regulation was established to protect the public interest and promote competition in the insurance market. 

According to the III, insurance rate regulation began in the late nineteenth century, when the state was able to control railroads and other domestic commerce, with little or no federal interference. At that time, the majority of insurance was sold by insurers who worked in one state only, but eventually larger companies began to spread into other states, which then formed regulatory systems.  A few years later, in 1871, the National Association of Insurance Commissioners (NAIC) was founded to unify and organize the commissioners of the different states. During the Depression, belief in the efficacy of governmental involvement in private market grew, until federal regulation was accepted. 

Today, insurers seek to show that regulation has negative effects on the insurance market, via its negation of competition (which would otherwise ensure lower prices, more efficiency, and excellent products.) According to the III, the Gramm-Leach-Bliley Act granted the wishes of insurance companies, by persuading each state government to enact reform legislation. 

The process of commercial deregulation differs in each state, depending on the size of the commercial insurer that is seeking deregulation.   The III reports that in Arkansas, for example, to qualify as a “large commercial risk,” a company must have 25 employees, a full-time certified risk manager, and a $250,000 premium level.  However, some states, such as Pennsylvania and Oklahoma, have much lower minimum premium levels- $25,000 and $10,000 respectively. 

Obviously, the states that are most open to legislative reform are also most accepting of rate deregulation.  “We’ve had a lot of success with rate deregulation,” says John Marlow of the American Insurance Association (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.”

Economists generally extol rate deregulation as an outstanding success. Peter J. Wallison of the American Enterprise Institute for Public Policy Research (AEI), praises deregulation, stating, “Ultimately, rate deregulation was successful in virtually every area of the economy in which it was tried.  Indeed it is difficult to think of a policy idea that has had such complete success in the real world.”

However, there are dissenting views on the subject of deregulation.  The AIA reports that commercial deregulation has been a disappointment.  Dave Unnewehr, the Assistant Vice President of AIA Policy Development and Research claims that “the states that did do something often passed thresholds that are so high that relatively few businesses are impacted.”  He goes on to report, “AIA is putting most of our efforts on regulatory modernization on proposed federal legislation authorizing Optional Federal Chartering (OFC)."

Insurance rate deregulation is currently becoming more widespread, because of the possible mutual benefit to both the insurer and the insured.  “To date, deregulation has been a one-way street in favor of policyholders,” says Robert Hartwig, chief economist at the III 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.”

Apparently, the benefits of rate deregulation are becoming clear to legislators, as well as economists; the Insurance Information Institute reports that, as of August 2004, almost every state had passed licensing reform legislation, and the number of states that are adopting deregulation policies continues to grow.

Sources: The Insurance Information Institute

The American Enterprise Institute for Public Policy Research

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