NAII Points to Rate Regulation, Repair Costs as Major Factors in Average Auto Premium Results

June 29, 2001

According to the National Association of Independent Insurers (NAII), a state’s rating law plays a significant role in what people pay for auto insurance, Consumers in states with more regulation pay higher premiums generally than those in states where competition is the primary regulator of rates.

In reviewing information from NAII’s Fast Track Monitoring System and comparing it to the latest report on average auto insurance premiums compiled by the National Association of Insurance Commissioners (NAIC), NAII’s research division believes that the decline in average insurance premiums experienced from 1997 through 1999 may not continue.

NAII’s Fast Track Monitoring System reflects statistical data for 70 percent of the auto insurance market through December 31, 2000. A recent National Association of Insurance Commissioners’ (NAIC) average auto premium report reflects data on nearly all of the auto insurance market through 1999.

According to NAII, states that heavily regulate personal lines rates through prior approval laws or similar bureaucracies have higher average premiums than states with competitive rating systems (informational filing, use-and-file, file-and-use or flex rating). The auto insurance premium in the 20 states with burdensome state regulation averaged $817, while the average premium in the 26 states with competitive rating was $724 in 1999, based on NAIC figures. The remaining five states have some combination of the prior approval and competitive ratings and were excluded from the analysis.

According to the NAII, companies writing in non-competitive environments tend to be less willing to act promptly to adjust rates down when the loss experience improves, because insurers fear they will not be able to get necessary rate increases if costs go up in the future. Academic studies have shown that rate regulation actually discourages rate reductions and tends to keep rates artificially high.

According to NAIC figures, about one-third of the states had an increase in the combined average auto insurance premium (liability and physical damage) from 1998 to 1999. The NAII noted the state with the highest increase at 9.7 percent in the past year is Massachusetts, which uses non-competitive, state-mandated rates.

NAII says that other factors can have a major impact on a state’s rates and premiums. For example, California replaced its competitive rating system with a prior approval law, when voters passed Proposition 103 in 1988. The NAII believes that although rates have been dropping in California during the last five years, the cause for this was not the type of regulation, as proponents of prior approval say, but the fact that California eliminated third party bad faith lawsuits, enacted ‘no pay/no play’ legislation limiting liability claims for uninsured motorists, improved highway and traffic safety laws and enacted mandatory seat belt legislation.

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