Earthquakes: Risk and Insurance Issues
Earthquakes: Risk and Insurance Issues
An earthquake is a sudden and rapid shaking of the earth caused by the break-
ing and shifting of rock beneath the earth’s surface. This shaking can sometimes
trigger landslides, avalanches, flash floods, fires and tsunamis. Unlike other nat-
ural disasters such as hurricanes, there are no specific seasons for earthquakes.
Earthquakes in the United States are not covered under standard homeown-
ers or business insurance policies. Coverage is usually available for earthquake
damage in the form of an endorsement to a home or business insurance policy.
However, insurers that do not sell earthquake insurance may still be impacted
by these catastrophes due to losses from fire following a quake. These losses
could involve claims for business interruption and additional living expenses as
well. Cars and other vehicles are covered for earthquake damage under the com-
prehensive part of the auto insurance policy.
In the United States about 5,000 quakes strike each year. Since 1900, earth-
quakes have occurred in 39 states and caused damage in all 50. One of the worst
catastrophes in U.S. history, the San Francisco Earthquake of 1906, would have
caused insured losses of $96 billion, were the quake to hit under current eco-
nomic and demographic conditions, according to AIR Worldwide.
The potential cost of earthquakes has been growing because of increasing urban
development in seismically active areas and the vulnerability of older buildings,
which may not have been built or upgraded to current building codes.
The Northridge earthquake, which struck Southern California on January
17, 1994, was the most costly quake in U.S. history, causing an estimated $20
billion in total property damage, including $12.5 billion in insured losses. In its
wake the California Earthquake Authority (CEA) was created in 1996. Fearing
insolvency from another massive earthquake, the vast majority of insurers in
the state’s homeowners insurance market had severely restricted or ceased writ-
ing coverage altogether after Northridge. To ensure the availability of homeown-
ers coverage and end a serious threat to the vitality of the state’s housing mar-
ket, the California Legislature established the CEA as a publicly managed, largely
privately funded entity.
Only about 12 percent of Californians now purchase earthquake coverage,
down from about 30 percent in 1996 when the devastating 1994 Northridge
quake was still fresh in people’s minds. To encourage more Californians to buy
the coverage, the CEA, approved an average 22 percent rate cut, which went
into effect July 1, 2006. The CEA says that a sharp drop in the cost of reinsur-
ance and several years without a major quake, allowing the buildup reserves,
made the cut possible.Losses from Major Recent Earthquakes: At the beginning of 2010 there were
two major earthquakes: a 7.0 magnitude quake in Haiti in January and a 8.8
magnitude quake in Chile in February. The Haiti quake killed over 220,000 peo-
ple and caused $8 billion dollars in damages, most of it uninsured. The Chile
quake, though more powerful, was far less deadly as its epicenter was located in
a region with relatively low population density and because Chile’s history of
damaging quakes has led to strict building codes. The Chile quake and its associ-
ated tsunami caused over $4 billion in insured losses and more than $20 billion
in total damages (including insured and uninsured losses), according to Munich
Re. It caused about 500 deaths.
Financial and Market Conditions
Many forces affect the price, availability and security of the insurance product.
Some are external, such as the state of the economy, changes in interest rates
and the stock market, regulatory activity, the number and severity of natural
disasters, growth in litigation and rising medical costs. Others are internal, such
as the level of competition.
Fortunately, insurance companies run their businesses conservatively, as
if every day might bring some new disaster, so despite current economic and
financial conditions, the industry has been able to function normally. Unlike
banks, insurers are not highly leveraged (they generally do not borrow to make
investments or to pay claims); they limit the amount of risk they assume to the
capital they have on hand; and because they do not sell the risks they assume to
another party—they have some “skin in the game”—they must underwrite care-
fully or suffer the consequences.
The insurance industry is cyclical. Rates and profits fluctuate depending on
the phase of the cycle, particularly in commercial coverages. The profitability
cycle may be somewhat different for different types of insurance.
The cycle of the early and mid-1980s was among the most severe that the
industry has experienced. That cycle centered on liability insurance. The most
recent hard market began early in about 2001 and peaked in early 2004. The
industry has been experiencing a soft market due to the poor economy. While
there had been some indication that rates were flattening out, industry analysts
expect to soft market to continue well into 2010.
The Insurance Cycle: The property/casualty insurance industry has exhibited
cyclical behavior for many years, as far back as the 1920s. These cycles are char-
acterized by periods of rising rates leading to increased profitability. Following
a period of solid but not spectacular rates of return, the industry enters a down
phase where prices soften, supply of insurance becomes plentiful and, eventu-
ally, profitability diminishes or vanishes completely. In the cycle’s down phase,
as results deteriorate, the basic ability of insurance companies to underwrite
new business or, for some companies even to renew some existing policies, can
be impaired because the capital needed to support the underwriting of risk has
been depleted through losses. Cycles vary in their severity.
The insurance industry cycle is not unlike the cycle that occurs in agri-
culture, for example, in the wheat and beef markets. Demand for the product
in both industries is relatively stable and is relatively unresponsive to price
changes, while supply can vary from year to year. This means that when supply increases, lowering the price will not instantly “clear” the market of excess sup-
ply. If the price of auto insurance is cut in half, people will still buy only one
policy, although they may increase the amount of coverage they purchase.
In the 1950s and 1960s cycles were regular, with a three-year period of soft
pricing followed by a three-year period of hard pricing in practically all lines
of property/casualty insurance. In the 1970s and 1980s, there were only two
cycles, one mainly affecting auto insurance in the mid-1970s and the other in
the mid-1980s, affecting commercial liability insurance. The commercial liabil-
ity insurance cycle gave rise to the “liability crisis,” when certain types of com-
mercial liability coverages, such as insurance for daycare centers, municipalities,
ski resorts and any establishment selling liquor, became difficult to obtain. Since
that time, with the exception of the difficulty in obtaining medical malpractice
insurance in the early part of the last decade, the insurance cycle has had less of
an impact on the public. Flood Insurance
Because of frequent flooding of the Mississippi River during the 1960s and the
rising cost of taxpayer funded disaster relief for flood victims, in 1968 Congress
created the National Flood Insurance Program (NFIP). It has three mandates:
to provide residential and commercial insurance coverage for flood damage, to
improve floodplain management and to develop maps of flood hazard zones.
While the comprehensive section of an auto insurance policy covers flood
damage to vehicles, there is no coverage for flooding in standard homeowners,
renters or commercial property insurance policies. It is available in a separate
policy from the NFIP and from a few private insurers. Despite efforts to publi-
cize this, many people exposed to the risk of floods still fail to purchase flood
insurance.
It was the widespread flooding associated with Hurricane Katrina in 2005
that drew attention to the NFIP and set in motion debate about how to improve
it. So far, Congress has not taken steps to significantly revamp the program.
Federal flood insurance is only available where local governments have
adopted adequate flood plain management regulations for their floodplain areas
as set out by NFIP. About 20,400 communities across the country participate in
the program. NFIP coverage is also available outside of the high-hazard areas.
The NFIP law was amended in 1969 to provide coverage for mudslides and
again in 1973. Until then, the purchase of flood insurance had been voluntary,
with only about one million policies in force. The 1973 amendment put con-
straints on the use of federal funds in high-risk floodplains, a measure that was
expected to lead to almost universal flood coverage in these zones. The law pro-
hibits lenders that are federally regulated, supervised or insured by federal agen-
cies from lending money on a property in a floodplain zone when a community
is participating in the NFIP, unless the property is covered by flood insurance.
Legislation was enacted in 1994 to tighten enforcement of flood insurance
requirements. Regulators can now fine banks with a pattern of failure to enforce
the law and lenders can purchase flood insurance on behalf of homeowners
who fail to buy it themselves, then bill them for coverage. The law includes a
provision that denies federal disaster aid to people who have been flooded twice
and have failed to purchase insurance after the first flood.
Buildings constructed in a floodplain after a community has met regula-
tions must conform to elevation requirements. When repair, reconstruction or
improvement to an older building equals or exceeds 50 percent of its market
value, the structure must be updated to conform to current building codes.
A 2007 NFIP study on the benefits of elevating buildings showed that due to significantly lower premiums homeowners can usually recover the higher con-
struction costs in less than five years for homes built in a “velocity” zone, where
the structure is likely to be subject to wave damage, and in five to 15 years in a
standard flood zone. The Federal Emergency Management Agency (FEMA) esti-
mates that buildings constructed to NFIP standards suffer about 80 percent less
damage annually that those not built in compliance.
How It Works: The NFIP is administered by FEMA, now part of the Depart-
ment of Homeland Security. Flood insurance was initially only available
through insurance agents who dealt directly with the federal program. The
“direct” policy program has been supplemented since 1983 with a private/public
cooperative arrangement, known as “Write Your Own,” through which a pool
of insurance companies issue policies and adjust flood claims on behalf of the
federal government under their own names, charging the same premium as the
direct program. Participating insurers receive an expense allowance for policies
written and claims processed. The federal government retains responsibility for
underwriting losses. Today, most policies are issued through the Write-Your-
Own program but some nonfederally backed coverage is available from the pri-
vate market.
The NFIP is expected to be self-supporting (i.e., premiums are set at an
actuarially sound level) in an average loss year, as reflected in past experience.
In an extraordinary year, as Hurricane Katrina demonstrated, losses can greatly
exceed premiums, leaving the NFIP with a huge debt to the U.S. Treasury that it
is unlikely to be able to pay back. Hurricane Katrina losses and the percentage of
flood damage that was uninsured led to calls for a revamping of the entire flood
program.
As with other types of insurance, rates for flood insurance are based on the
degree of risk. FEMA assesses flood risk for all the participating communities,
resulting in the publication of thousands of individual flood rate maps. High-
risk areas are known as Special Flood Hazard Areas, or SFHAs.
Flood plain maps are redrawn periodically, removing some properties previ-
ously designated as high hazard and adding new ones. New technology enables
flood mitigation programs to more accurately pinpoint areas vulnerable to
flooding. As development in and around flood plains increases, run off patterns
can change, causing flooding in areas that were formerly not considered high
risk and vice versa.
People tend to underestimate the risk of flooding. The highest-risk areas
(Zone A) have an annual flood risk of 1 percent and a 26 percent chance of
flooding over the lifetime of a 30-year mortgage, compared with a 9 percent risk of fire over the same period. In addition, people who live in areas adjacent to
high-risk zones may still be exposed to floods on occasion. Ninety percent of all
natural disasters in this country involve flooding, the NFIP says. Since the incep-
tion of the federal program, some 25 to 30 percent of all paid losses were for
damage in areas not officially designated at the time of loss as special flood haz-
ard areas. NFIP coverage is available outside high-risk zones at a lower premium.
To prevent people putting off the purchase of coverage until waters are
rising and flooding is inevitable, policyholders must wait 30 days before their
policy takes effect. In 1993, 7,800 policies purchased at the last minute resulted
in $48 million in claims against only $625,000 in premiums.
Proposals for Change: The NFIP has four major goals: to decrease the risk of
flood losses; reduce the costs and consequences of flooding; reduce the demand
for federal assistance; and preserve and restore beneficial floodplain functions.
In a final report published in 2006 by the American Institutes for Research
(AIR), which conducted an evaluation of the federal flood insurance program,
AIR said that although much had been accomplished, the program fell short
of meeting its goals in part because the NFIP did not have the ability to guide
development away from floodplains and cannot restore beneficial floodplain
functions once they have been impaired. In addition, AIR said, many people
still are not covered or not adequately covered for flood damage. AIR also noted
that the NFIP was hampered in reaching its goals by insufficient Congressional
funding, lack of pertinent data, misperceptions about the nature of the program
and the breakdown in coordination among its three major sectors.
A report published by FEMA in 2007 suggests that development patterns
should be changed to protect environmentally sensitive areas and that commu-
nities in the flood program should be encouraged or required to ban develop-
ment in these locations.
Another criticism of the NFIP is that it does not charge enough for cover-
age. Among the reasons for the premium shortfall is that the cost of coverage
on dwellings that were built before floodplain management regulations were
established in their communities is subsidized. As a result, the premiums paid
for flood coverage by the owners of these properties reflect only 30 to 40 per-
cent of the true risk of loss. In January 2006 FEMA estimated an annual shortfall
in premium income of $750 million due to these subsidies. Some subsidized
properties also suffer repetitive losses. Repetitive loss properties accounted for
about $4.6 billion in claims payments between 1978 and 2004. The AIR report
acknowledged that the current system is not eliminating existing damage-prone
buildings as quickly as expected. Insurance Fraud
The Insurance Information Institute estimates that fraud accounts for 10 percent
of the property/casualty insurance industry’s incurred losses and loss adjustment
expenses, or about $30 billion a year. This fraud results in higher premiums.
Fraud may be committed at different points in the insurance transaction by
different parties: applicants for insurance, policyholders, third-party claimants
and professionals who provide services to claimants. Common frauds include
“padding,” or inflating actual claims; misrepresenting facts on an insurance
application; submitting claims for injuries or damage that never occurred; and
“staging” accidents.
Prompted by the incidence of insurance fraud, 41 states and the District of
Columbia have set up fraud bureaus (some bureaus have limited powers, and
some states have more than one bureau to address fraud in different lines of
insurance). These agencies have reported increases in referrals (tips about sus-
pected fraud), cases opened, convictions and court-ordered restitution.
Insurance fraud can be “hard” or “soft.” Hard fraud occurs when someone
deliberately fabricates claims or fakes an accident. Soft insurance fraud, also known
as opportunistic fraud, occurs when people pad legitimate claims, for example, or,
in the case of business owners, list fewer employees or misrepresent the work they
do to pay lower workers compensation premiums.
People who commit insurance fraud range from organized criminals, who
steal large sums through fraudulent business activities and insurance claim
mills, to professionals and technicians, who inflate the cost of services or charge
for services not rendered, to ordinary people who want to cover their deductible
or view filing a claim as an opportunity to make a little money.
Some lines of insurance are more vulnerable to fraud than others.
Healthcare, workers compensation and auto insurance are believed to be the
sectors most affected.
Insurance fraud received little attention until the 1980s when the rising
price of insurance and the growth in organized fraud spurred efforts to pass
stronger antifraud laws. Allied with insurers were parties affected by fraud—
consumers who pay higher insurance premiums to compensate for losses from
fraud; direct victims of organized fraud groups; and chiropractors and other
medical professionals who are concerned that their reputations will be tar-
nished.
One out of five Americans think it is acceptable to defraud insurance com-
panies under certain conditions, according to the Coalition Against Insurance
Fraud. The organization released the findings in a 2008 study, “The Four Faces of Insurance Fraud.” It found that the public is consistently more tolerant of
specific insurance frauds today than it was 10 years before.
In addition, studies by the Insurance Research Council show that significant
numbers of Americans think it is all right to inflate their insurance claims to
make up for insurance premiums they have paid in previous years when they
have had no claims or to pad a claim to make up for the deductible they would
have to pay.
Insurers must preserve the fine line between investigating suspicious claims
and harassing legitimate claimants and the need to comply with the time
requirements for paying claims imposed by fair claim practice regulations. All
states have unfair claim settlement practice laws on their books to ensure that
the parties involved are informed of the progress of investigations and that
investigators settle the claim promptly or within a specified amount of time.
About 19 states have provisions that provide guidance and protection for inves-
tigators by allowing time limit extensions or waivers and detailing what evi-
dence is required and to whom the evidence should be made available.
Insurers’ Antifraud Measures: The legal options of an insurance company
that suspects fraud are limited. The insurer can only inform law enforcement
agencies of suspicious claims, withhold payment and collect evidence for use
in a court. The success of the battle against insurance fraud therefore depends
on two elements: the level of priority assigned by legislators, regulators, law
enforcement agencies and society as a whole to the problem and the resources
devoted by the insurance industry itself. To that end most insurers have estab-
lished special investigation units (SIUs). These entities help identify and investi-
gate suspicious claims.
Insurers have also created a national fraud academy. A joint initiative of the
Property Casualty Insurers Association of America, the FBI, National Insurance
Crime Bureau (NICB) and the International Association of Special Investigating
Units, it is designed to fight insurance claims fraud by educating and training
fraud investigators. It offers online classes under the leadership of the NICB.
The Liability System and
Medical Malpractice Insurance Issues
Litigiousness has become a societal problem in the United States. The tort sys-
tem cost $254.7 billion in 2008 in direct costs, which translates into $838 per
person, and many billions of dollars more in indirect costs, according to Towers
Perrin’s most recent tort costs study. U.S. consumers pay directly for the high
cost of going to court through higher liability insurance premiums because lia-
bility insurance rates reflect what insurance companies pay out for their policy-
holders’ legal defense and any judgments against them. And they pay indirectly
in higher prices for goods and services since businesses pass on to consumers
the expenses they incur in protecting themselves against lawsuits, including the
cost of commercial liability insurance.
Beginning in the 1980s, in an effort to reduce litigation costs, business
groups and others mounted a campaign to reform tort law. Tort law is the basis
for the U.S. liability system. Most reforms have taken place on the state level
and during the last decade all but a handful of states passed significant tort law
reforms. However, some have been overturned by the courts.
Many reform efforts have focused on medical malpractice issues. Medical
malpractice insurance covers doctors and other professionals in the medical
field for liability claims arising from their treatment of patients.
The cost of medical malpractice insurance began to rise in the early 2000s
after a period of essentially flat prices. Rate increases were precipitated in part by
the growing size of claims, particularly in urban areas. Among the other factors
driving up prices was a reduced supply of available coverage as several major
insurers exited the medical malpractice business because of the difficulty of
making a profit.
New research suggests that premium increases may be moderating but, for
any significant turnaround to take root, major reforms in the delivery of medi-
cal care that focus on patient safety need to occur, industry observers say.
State Tort Reform Issues
Caps in Noneconomic Damages: According to the National Conference of
State Legislatures, 30 states, the Virgin Islands and Puerto Rico limit jury awards
in malpractice cases. In the past few years, a number court have ruled against
such limits. In Georgia, the Supreme Court ruled that a 2005 state law that lim-
ited jury awards for pain and suffering in malpractice cases to $350,000 improp-
erly interfered with a jury’s duty to determine damages in a civil lawsuit. In the
decision Chief Justice Carol Hunstein said that limits in any amount violate the right to trial by jury. In Illinois, the Supreme Court overturned the state’s 2005
medical malpractice statute, which capped noneconomic (pain and suffering)
medical malpractice awards at $500,000 in lawsuits against physicians and $1
million for hospitals. The court ruled that the law violated the state’s constitu-
tional principle of separation of powers in that lawmakers had made decisions
that should be made by judges and juries.
Some states, such as Maryland, are deciding to retain their caps when chal-
lenged.
Arbitration: To keep small disputes out of the courts, insurers are increasingly
turning to arbitration. The nation’s largest arbitration provider, nonprofit Arbi-
tration Forums, resolved more than 520,000 inter-insurance disputes in 2009
valued at $2.5 billion, for a savings in litigation costs of $700 million. Disputes
leading to arbitration typically arise when insurance or self-insured companies
believe their policyholders or employees are not at fault or due to disagreement
over the percentage of liability or the amount of damages. More than 85 percent
of these disputes involve auto collisions.
Tort Liability Environment: In December 2009 the American Tort Reform
Association (ATRA) released its annual list of states and counties characterized
as “Judicial Hellholes,” places with courts that have a disproportionately harm-
ful impact on civil litigation. ATRA explains that personal injury lawyers seek
out these places as targets for their efforts to expand liability and develop new
opportunities for litigation. ATRA’s newest list includes six Judicial Hellholes,
including holdovers South Florida; West Virginia; Cook County, Illinois; and
Atlantic County, New Jersey, and New Mexico appellate courts and New York
City, which are new on the list. ATRA highlights several reforms that can help
restore balance to these jurisdictions. They include stopping venue shopping
(looking for jurisdictions where juries are favorable to plaintiffs), imposing
sanctions for bringing frivolous lawsuits, stemming abuse of consumer laws,
ensuring that noneconomic damage awards serve a compensatory purpose, and
strengthening rules to promote sound science in the courtroom. Microinsurance
A growing number of insurers are tapping into markets in developing countries
through microinsurance projects, which provide low-cost insurance to individu-
als generally not covered by traditional insurance or government programs.
Microinsurance products tend to be much less costly than traditional products
and thus extend protection to a much wider market. The approach is an out-
growth of the microfinancing projects developed by Bangladeshi Nobel Prize-
winning banker and economist Muhammad Yunus, which helped millions of
low-income individuals in Asia and Africa to set up businesses and buy houses.
American International Group Inc. (AIG) was one of the first companies to offer
microinsurance and began selling policies in Uganda in 1997. Swiss Re, Munich
Re, Allianz and Zurich Financial Services have also entered the microinsurance
arena. Disasters such as the 2005 tsunami in Indonesia and the 2010 Haiti earth-
quake have demonstrated the need for insurance in many regions, prompting
insurers to develop new products. While the coverage is often geared to protec-
tion from natural disasters, there are also programs covering life/health risks as
well.
With limited growth prospects in the insurance markets of developed
countries, which are largely saturated, insurers see microinsurance in emerging
economies as presenting significant potential for growth and profitability. A
2009 Swiss Re report on world insurance markets found that premium growth in
emerging markets far outpaced growth in industrialized countries in 2008. The
study identified the following regions as “emerging markets”: Latin America,
Central and Eastern Europe, South and East Asia, the Middle East (excluding
Israel) and Central Asia, Turkey and Africa.
In 2009 the International Association of Insurance Supervisors, the World
Bank, the International Labor Organization and other multilateral groups
launched a program to improve access to insurance in emerging and under-
served markets called the “Access to Insurance Initiative.” Also in 2009 rep-
resentatives from over 60 countries participated in the Fifth International
Microinsurance Conference, which was organized by the reinsurer Munich Re
and the Microinsurance Network, a joint effort of aid organizations, multilateral
agencies, insurers, policymakers and academics.
Regulation
Insurance is regulated by the individual states. The move to modernize insur-
ance regulation is being driven in part by the globalization of insurance services.
Some large U.S. companies that operate in other countries support the concept
of a federal system that provides one-stop regulatory approval while others
believe the merits of a state system outweigh the virtues of a single national
regulator. As a result of discussions about the merits of each system, states are
making it easier for insurers to respond quickly to market forces. States monitor
insurance company solvency. One important function related to this is oversee-
ing rate changes. Rate making is the process of calculating a price to cover the
future cost of insurance claims and expenses, including a margin for profit. To
establish rates, insurers look at past trends and changes in the current environ-
ment that may affect potential losses in the future. Rates are not the same as
premiums. A rate is the price of a given unit of insurance—$2.50 per $1,000
of earthquake coverage, for example. The premium represents the total cost of
many units. If the price to rebuild a house is $150,000, the premium would be
150 x $2.50. Rates vary according to the likelihood and potential size of loss.
Using the example of earthquake insurance, rates would be higher near a fault
line and for a brick house, which is more susceptible to damage, than a frame
one.
While the regulatory processes in each state vary, three principles guide
every state’s rate regulation system: that rates be adequate (to maintain insur-
ance company solvency), but not excessive (not so high as to lead to exorbitant
profits), nor unfairly discriminatory (price differences must reflect expected
claim and expense differences). Recently, in auto and home insurance, the
twin issues of availability and affordability, which are not explicitly included
in the guiding principles, have been assuming greater importance in regulatory
decisions.
In line with these principles, states have adopted various methods of regu-
lating insurance rates, which fall roughly into two categories: “prior approval”
and “competitive.” This does not mean there is no competition in states using a
prior approval system. Most approved rates in prior approval states are the rates
used, but in some cases, particularly in commercial coverages, companies com-
pete at rates below these approved ceilings.
Regulation Modernization
Increasingly, even in the most regulated states, officials are relying on competi-
tion among insurance companies to keep rates down and are modernizing and streamlining the rate setting process.
The move to modernize insurance regulation is being driven in part by the
globalization of insurance services. Some large U.S. companies that operate in
other countries support the concept of a federal system that provides one-stop
regulatory approval while others believe the merits of a state system outweigh
the virtues of a single national regulator. As a result of discussions about the
merits of each system, states are making it easier for insurers to respond quickly
to market forces. Since 2009, various pieces of legislation have been introduced
in Congress that respond to a number of concerns: lack of an entity at the fed-
eral level that can represent insurance interests, particularly in the discussion
of international issues; the need for better oversight of systemic risk—the inter-
connectedness of the risk assumed by a few large financial services companies
whose failure could bring down the entire financial system; and the need to
streamline the regulation of reinsurers and surplus lines insurers.
For example, in Georgia, a law was signed in May 2008 that allows auto
insurance companies to adjust most rates without the prior approval of the
insurance commissioner. Georgia joins at least 30 other states that let rates more
closely reflect competition in the marketplace
Type of State Rating Laws
Prior Approval: The insurer must file rates, rules, etc. with state regulators.
Depending on the statute, the filing becomes effective when a specified waiting
period elapses (if the state regulator does not take specific action on the filing, it
is deemed approved automatically) or the state regulator formally approves the
filing. A state regulator may disapprove a filing at any time if it is not in compli-
ance with the law. The state regulator normally must hold a hearing to establish
noncompliance.
Modified Prior Approval: This is a hybrid of “prior approval” and “file and
use” laws. If the rate revision is based solely on a change in loss experience then
“file and use” may apply. However, if the rate revision is based on a change in
expense relationships or rate classifications, then “prior approval” may apply.
A state regulator may disapprove a filing at any time if it is not in compliance
with the law. The state regulator normally must hold a hearing to establish non-
compliance.
Flex Rating: The insurer may increase or decrease a rate within a “flex band,”
or range, without approval of the state regulator. Generally, either “file and use”
or “use and file” provisions apply. Generally, the insurer must file rate increases or decreases that fall outside the established “flex band” with the state regula-
tor for approval. Typically, “prior approval” provisions apply. The “flex band” is
set either by statute or by the state regulator. A state regulator may disapprove
a filing at any time if it is not in compliance with the law. The state regulator
normally must hold a hearing to establish noncompliance.
File and Use: The insurer must file rates, rules, etc. with the state regulator.
The filing becomes effective immediately or on a future date specified by the
filer. A state regulator may disapprove a filing at any time if it is not in compli-
ance with the law. The state regulator normally must hold a hearing to establish
noncompliance.
Use and File: The filing becomes effective when used. The insurer must file
rates, rules, etc. with the state regulator within a specified time period after first
use. A state regulator may disapprove a filing at any time if it is not in compli-
ance with the law. The state regulator normally must hold a hearing to establish
noncompliance.
State-Prescribed: The state regulator determines and promulgates the rates,
classifications, forms, etc. to which all insurers must adhere. Insurers are usually
permitted to deviate from state prescribed rates, classifications, forms, etc., with
the approval of the state regulator.
No File/Record Maintenance: The insurer need not file rates, rules, etc. with
the state regulator. Rates, rules, etc. become effective when used. The state regu-
lator may periodically examine insurer(s) to ensure compliance with the law.
Generally, there are record maintenance requirements, under which insurers
must make their rating systems available to the state regulator for examination.
A state regulator may order discontinuance of the use of the material at any
time if it is not in compliance with the law. The state regulator normally must
hold a hearing to establish noncompliance.
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