Insurance rates and the Commissioner’s authority over them

Every driver is legally required to have auto insurance and every homeowner with a mortgage has home insurance. What they all have in common is that none of them like hearing that their insurance bills are going up.

But when they do, people reach out to the Office of the Insurance Commissioner to voice their displeasure and, sometimes, ask why the Insurance Commissioner lets them raise prices.

The answer? The rate approval process, and the OIC’s role in it, is part of state law.

The OIC doesn’t set property and casualty insurance rates, but it approves rate changes requested by insurance companies. That includes home and auto insurance.

Companies file rate changes, with financial data that they think justifies that change, and the OIC’s actuarial staff reviews those filings, checks the numbers, and either approves or rejects the filing. It’s not a quick process; filings can be hundreds of pages long and the review process can take weeks.

The Insurance Commissioner’s authority in this process is established in state law. The rates must be approved if they meet the standard of being “reasonable, and not excessive, inadequate, or unfairly discriminatory.”

“A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. Such costs include claims, claim settlement expenses, operational and administrative expenses, and the cost of capital.”

Additionally:

“(4) The commissioner will not consider rates excessive if the expected operating ratio corresponding to the proposed rate level is less than or equal to five percent.

“(5) The commissioner will not consider rates inadequate if the expected operating ratio corresponding to the proposed rate level is greater than or equal to zero.”

That all means that rate changes, legally, must be approved if the numbers are actuarially sound.

Rates and premiums

Rates and premiums are both used in discussions on insurance costs, but they’re two different pieces of the puzzle. An insurance rate is the price for one unit of risk, which an insurance company uses to start premium calculations. A premium is the amount you pay for your policy, once the base rate is multiplied by your specific rating factors (age, location, claim history, etc.).

Think of it like a trip to the gas station: Gas is $3.50 per gallon, it costs you $35 to fill your tank. The rate is $3.50, and the premium is $35 — the rate multiplied by the number of gallons you bought.

Filing frequency

Insurance companies, by law, can file rate changes as often as necessary to keep their rates “reasonable, and not excessive, inadequate, or unfairly discriminatory.”

Companies are also not required to file updated rates every year, and rates are reviewed on a case-by-case basis, with decisions made specifically based on the company’s financial filings. The OIC does not make a blanket decision to raise (or cut) rates across the board.

What can I do if my costs go up?

Ask why! If your insurance company increases your premiums, they have to explain why if you ask. Just send them a message using the contact information on your renewal notice or billing statement.

If you’ve still got questions about your insurance, contact the OIC.