Industry Hopes Flex Rating Is Next Step for Restrictive States

A new flex-rating model for personal lines endorsed by state insurance lawmakers may be just the small step some states need to move away from restrictive regulatory environments, industry observers believe.

“Flex rating is not for every state,” says Robert Zeman, senior vice president, industry and regulatory affairs for the Property Casualty Insurers Association of America (PCI), “but for some, it’s a stepping stone.”

The Property Casualty Committee of the National Conference of Insurance Legislators (NCOIL), during its recent spring meeting, considered a model act designed to move states closer to competitive rating.

The flex-rating model mandates that a filing made by an insurer cannot exceed an overall statewide rate increase or decrease of 12 percent in the aggregate for all coverages that are subject to the filing and that the increase or decrease would take effect the date it is filed. The 12 percent limitation does not apply on an individual insured basis.

The model includes language to clarify that the flex rating model is an “interim step” in the process of having states adopt the more comprehensive Insurance Modernization Act.

NCOIL’s Property/Casualty Insurance Modernization Act, which was adopted by NCOIL on July 13, 2001 calls for a use and file rating law for personal lines, a more pro-competition model than flex rating.

“The ultimate goal is for states to embrace open competition and this (flex rating) model act may serve as a transitional mechanism for states to reach that desired end,” said Zeman. “This model act may also provide an opportunity for states with restrictive rating laws for personal lines to experience firsthand the stabilizing and positive impact of a more competitive rating environment.”

Zeman said the NCOIL move is reflective of increased attention around the country on ways to encourage more competition in personal lines insurance.

Last year Louisiana went from prior approval of personal lines rates to a 10 percent flex rating band. South Carolina adopted elements of flex rating in its new personal lines system. In Washington and Nevada, flex rating proposals made progress last legislative session, passing one house but not another in both states.

New Hampshire adopted a use and file system, and even beleaguered New Jersey tweaked its rate filing system to encourage more competition. Although its sunset provision makes it vulnerable at times, a flex rating law has been in effect in New York for years.

Where will the competition bug hit next?

“Our hope is that others will follow,” Zeman adds, noting that Florida, Georgia and Mississippi have all discussed the idea of flex rating in recent legislative sessions.

Also, he advises watching Rhode Island. Ocean State lawmakers have indicated they will use the NCOIL flex rating model a basis for a proposal in 2005.

Could flex rating be the answer for Massachusetts personal lines, where controversy over auto insurance rate setting by the state continues? As Zeman said, it may not be for every state.