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State Rate Regulation Reform

Feb 19, 2007

State legislators across the country are becoming more comfortable with the idea of letting competition regulate rates.

In Connecticut the legislature passed SB 410, which would allow a flex rating band of 6 percent, enabling companies to raise or lower rates for homeowners or auto insurance without regulatory permission, as long as the average increase falls within that band, and to use them immediately. The insurance department would still review rate filings but would not be able to reject the increase as excessive as long as the market remained competitive. Flex rating allows insurers to respond quickly to loss trends and other market conditions. The law, which was passed in May 2006 and takes effect in July, is subject to a sunset provision of three years, after which it will lapse unless reauthorized by lawmakers before that time. Research suggests that in states with a flex rating system rates decline.

A flex rating system with a 5 percent statewide band and a 10 percent range in any territory was part of the comprehensive property insurance bill passed in Florida to make homeowners insurance more available and help stabilize prices.

In May 2005 Alaska passed a flex rating bill that allows insurers to increase or decrease rates by up to 10 percent without prior regulatory approval and in March 2005, the Nebraska legislature passed a regulatory modernization bill, LB 119, which would change personal lines, workers compensation, and farm and ranch coverage regulation from a prior approval to a file and use system. Texas instituted a competitive rating system in three stages, starting in 2003, as a way to stabilize the market.

In Kansas, a bill that would lower the rate and form filing exemption for commercial lines policyholders has become law. Under the measure, the threshold for exemption would drop to $3 million in property values from $5 million and to $5 million in revenues from $10 million. Maryland also passed legislation that would lower the level of premium needed to qualify as an exempt commercial policyholder from $75,000 to $25,000. Actions by these two states follow legislation passed in Virginia in 2005 and a number of other states earlier in the decade.