Prior Approval Study Off-base, Industry Says

You don’t have to be involved in the property/casualty insurance industry long to become acquainted with the many studies that are released each year on rating systems, both from consumers and from the industry. The most recent study was released by Consumer Federation of America (CFA) on prior approval of rates. J. Robert Hunter, CFA president and former insurance commissioner, says the study shows that rates have risen more slowly in the 15 states that require insurers to receive advance approval of rate increases from the state over the last two decades.

Hunter expands his conclusion when he says that prior approval also “spurs competition and generates significant profits for insurers.” And, adding another surprise conclusion Hunter says that the top-performing state in keeping rates down and providing comprehensive consumer protections was California.

“It is very clear that consumers fare best under a system of prior approval of insurance rates. Not only are rate changes held down, but competition is not dampened and profits are reasonable for the insurers,” said Hunter, CFA’s Director of Insurance.

Many national trade groups representing insurance companies from around the country immediately responded. The Property Casualty Insurers Association of America (PCI) countered Hunter.

“Opponents of competition-based rating such as CFA have the misguided impression that a prior approval system keeps insurance rates down. Ultimately price controls reduce the number of insurers doing business in a state, reduce consumer choice, and restrict market innovations,” said David Sampson, PCI’s president and CEO.

Other groups chimed in questioning the validity of the conclusions of the CFA study.

Neil Alldredge, vice president-state and regulatory affairs of the National Association of Mutual Insurance Companies (NAMIC) stated:

“Prior approval laws, such as those found in California and New York, harm consumers by keeping rates high and discouraging competition.”

Alldredge added that the study also claimed that states with less regulatory structure over auto rates had higher rate increases and less competitive markets.

“Taken to its logical conclusion, that would mean Illinois should have the highest rates in the country, since it is an open competition state,” Alldredge said. “In fact, Illinois ranks 28th.”

For more give and take by all, as well as a link to obtain the CFA study, in this issue see “Consumer Federation says prior approval works, industry says not true,” pp.54, 55.