Question

1. Although domiciled in Nebraska, Auto Insurance Company is licensed to sell auto insurance in 10 states. A different set of rates applies in each state. In five states, prior approval of rates is required. Two states have a file-and-use law, and the remaining three states have a flex-rating law. Auto Insurance Company has experienced poor underwriting results and needs to increase its rates.

1. Explain how each of the above rating laws would apply to Auto Insurance Company.

2. Describe some possible problems that Auto Insurance Company may experience in trying to get its rates increased in a prior-approval state.

2. Explain the role of the National Association of Insurance Commissioners in coordinating and serving state insurance regulators.

Answer 1

a. Prior Approval Law:-This law states that all the insurance companies are required to permission of the regulators before filing the rates.

File and use law:-This law is very useful for auto insurers. This is because as soon as the insurer files the rate with the state insurance department, the rates can be issued immediately for doing business.

Flexi rating law:-Under this law, an auto insurance company has to file for rate change to the regulators, if the rates exceed the specified range. The purpose is to allow auto insurers to change the rates as quickly as possible in response to changing market conditions.

b. Some possible problems that Auto Insurance may experience in trying to get its rates increased in a prior-approval state is that there is often a considerable delay in obtaining a needed rate increase, since, the state insurance departments are often understaffed. Also, the rate increase granted may be inadequate, and rate increases may be denied for political reasons. Another thing is that the statistical data required by the state insurance department to support a rate increase may not be readily available.

. Role of the National Association of Insurance Commissioners in coordinating and serving state insurance regulators:-

An insurance commissioner, who is elected or appointed by governor, has the responsibility to administer state insurance laws.Through administrative rulings, the state insurance commissioner wields considerable power over insurers doing business in the state. The insurance commissioner has the power to hold hearings, issue cease -and -desist orders, and revoke or suspend an insurer's license to do business.

The state insurance commissioners belong to an important organization known as the National Association of Insurance Commissioners(NAIC). The NAIC, founded in 1871,meets periodically to discuss industry problems that might require legislation or regulation. The NAIC has drafted model laws in various areas and recommended adoption of these proposals by state legislatures. Although the NAIC has no legal authority to force the states to adopt the recommendations, most states have accepted all or part of them.