Insurers Disappointed in Changes to Conn. Flex Rating Bill

March 21, 2006

A Connecticut legislative committee took a tentative step on the road to insurance rate modernization, but also posted a “Road Closed” sign that must be obeyed in two years.

HB-5463, which was reported favorably out of the Insurance and Real Estate Committee, would allow auto insurers to adjust rates within a predetermined percentage range without obtaining prior regulatory approval. The initiative is being advanced by the Insurance Association of Connecticut.

However, lawmakers made two changes to the proposal prior to reporting it out of committee. They lowered the deviation percentage from 12 percent to four percent, and they inserted a two-year sunset. Both changes are problematic, according to National Association of Mutual Insurance Companies (NAMIC).

“While any liberalization of rating can be viewed favorably, insurers should be given more freedom to adjust rates in response to changing market conditions,” said Paul Tetrault, Northeast state affairs manager for NAMIC. “We are hopeful that the deviation level can be increased as the bill moves through the legislative process.”

Tetrault also said that the two-year sunset inserted by the committee is cause for concern “because any move towards enhanced competition needs to be given time to work in the marketplace.”

In testimony submitted to the committee, Tetrault told lawmakers experience in other states has shown that consumers benefit when insurers have the freedom to respond quickly to marketplace dynamics.

“Greater rating freedom makes it easier for insurers to lower rates in a competitive environment because they know they can respond appropriately if market conditions change,” he asserted. “It also keeps rates stable by allowing insurers to make refined rating decisions. Finally, by removing rate review from state regulators, greater rating freedom promotes a better allocation of limited public resources.”

The Property Casualty Insurers Association of America also endorsed the original flex rating measure, which was based upon a model act by the National Conference of Insurance Legislators.

“Consumers benefit from the positive impact that flex rating has in the eight states that operate under this type of insurance regulatory system,” said Kristina Baldwin, regional manager and counsel for PCI. “On average, auto insurance premiums are 10 percent lower in states with flex rating or open competition than in states which require prior approval of rates. In addition, under flex rating, premiums are more stable because insurers are more likely to contain rate changes to the flex band if possible, so as to avoid the burdens associated with prior approval. Flex rating also promotes premium stability because flex rating allows companies to quickly react to market conditions, thereby preventing large rate swings.”

Baldwin maintained that having a flex-rating system in place also makes a state a more attractive place for insurers to do business, which encourages more companies to enter the market in flex rating states. In South Carolina, for example, the number of insurers writing auto insurance in the state increased from a low of only 83 carriers to 150 carriers two years after the implementation of a flex-rating system, she maintained.

“Implementing a more market-oriented approach to insurance regulation can increase the number of insurers doing business in a state,” said Baldwin. “This means more competition and more consumer choice. This system is beneficial to insurance consumers as prices are more stable.”

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