Question

In: Operations Management

A new insurer in a state that has an open-competition rating law is charging rates for...

A new insurer in a state that has an open-competition rating law is charging rates for auto insurance policies that are much lower than those of all of the other auto insurers in the state. Many of the other insurers express concern to the insurance commissioner that these rates are too low. Discuss whether the insurance commissioner can take action on the complaint in an open-competition rating system. Explain your answers.

Solutions

Expert Solution

The insurance commissioner can only take action if they can conclusively determine that the insurance company is charging extremely low insurance rates compared to other insurance companies which might make the insurer insolvent.

Insurance policy rates are usually dependent on the state, the premium, volume and conditions of insurance disbursal. If a company, even with lower rates can bring in enough volume of policies which would ensure that the company stays solvent, the rate would be acceptable.

However, to evenly protect the people and maintain competition in the industry, the states and FIO regulate the insurance industry wherein the rates cannot be changed below a certain point for particular coverage.

There is also the chance that since this is a new company, they have found a way to bring down the premiums. In which case, they can use the new rates immediately and then file them later.

The new insurer might also be serving only specific policyholders who have a good claims history. Underwriters are allowed to discriminate and provide lower rates for them.

Finally, the objective of an open-competitive system is to bring new insurers and at the same time bring down the policy rates.


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