Porter.8-Rates

Porter Chapter 8, Rate Regulation, discusses reasons to regulate (or not regulate) ratemaking in various lines of business.

  Forum

Study Tips

Porter Chapter 8, Rate Regulation, explicitly states that the educational objectives are:

• purpose, mechanics of rate regulation
• effect of U/W cycles on rates (recall a Hard market has High rates, High profits, & restrictive U/W – and soft markets are the opposite)

The chapter introduction goes on to say that the main topics covered are:

• goals of rate regulation
• who is involved with rate regulation (generally regulators in states where insurer has a presence)
• examples of rate rules (these are basically internal U/W guidelines)

These are not necessarily the items that are covered on the exam. The entire Porter text accounts for under 10% of the exam and your studying should be based primarily on the types of questions asked on past exams. (Much of the content of this chapter is covered in other readings and is likely already familiar to you.)

Estimated study time: 1 hour (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• assessing the level of and reasons for regulatory scrutiny for a given line of business
• purpose of rate regulation
• politics of rate regulation

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #2)	Porter.5-Opns-State	Porter.5-Opns-State	Porter.5-Opns-State	advisory organizations: - services provided
E (2016.Spring #2)	regulatory scrutiny: - surplus, ocean marine, WC	regulatory scrutiny: - commercial cats, PPA
E (2015.Spring #1)	purpose: - rate regulation	regulatory scrutiny: - HO, title, cyber
E (2013.Fall #2)	regulatory scrutiny: - inland marine, PPA, CGL	regulatory scrutiny: (politics) - ocean marine, WC

Full BattleQuiz You must be logged in or this will not work.

  Forum

In Plain English!

Chapter 8 of Porter is easy to study because the questions are repetitive.

Question: describe the purpose of rate regulation

• to ensure financial stability of insurers
• to protect policyholders

Over 70% of the points asked on this chapter ask you whether regulatory scrutiny is high or low for a particular line of business and to provide reasons for your answer. Here's an example:

Question: identify the level of regulatory scrutiny for ocean marine insurance and provide 2 reasons for your answer

• Ocean marine covers transportation of goods in vessels crossing waters

regulatory scrutiny: low

   - sophisticated buyers

   - individual risks

• Ok, let's think about why these reasons for low regulatory scrutiny make sense:

==> if buyers are sophisticated, they may not need protection from outside regulatory authorities

==> if risks are highly individualized, regulation is difficult for outside authorities (may not be a productive use of the regulator's time.)

Let's look at one more example:

Question: identify the level of regulatory scrutiny for private passenger auto insurance and provide 2 reasons for your answer

• PPA is mandatory

regulatory scrutiny: high

   - unsophisticated buyers

   - uniform risks

• Ok, let's think about why these reasons for high regulatory scrutiny make sense:

==> if risks are relatively uniform, regulation is easy for outside authorities (rating methodologies are well-known and uniform across insurers)

==> if buyers are unsophisticated, they will benefit from protection by outside regulatory authorities

That's almost everything you need to know. There are 7 different types of insurance listed in the text: (but past exam questions also ask you about lines of business not specifically covered)

• low scrutiny: ocean marine
• low scrutiny: inland marine
• low scrutiny: surety
• low scrutiny: title
• low scrutiny: commercial general liability
• high scrutiny: PPA
• high scrutiny: WC

And there is a lot of repetition in the reasons given in each case:

==> for low scrutiny

- sophisticated buyers

- individualized risks

- thin data

==> for high scrutiny

- unsophisticated buyers

- uniform rates

- credible data

- mandatory coverage

- complex classification system

- public interest & political awareness

All you have to do is use common sense to mix-and-match these reasons depending on the particular question. If you need to explain these reasons further, you should relate them back either to the main purpose of regulation which we covered at the top of this wiki article or the political theory of regulation. The political theory of regulation just states that regulatory scrutiny is higher when there is:

1. voter interest (like PPA rates, which affect almost everyone)
2. easy for policymakers to understand (this explains why the nobody gives a crap about surety insurance!)

The only other topic that might warrant mention is Rate Advisory Organizations:

statistical agents collect & report loss experience & trends

rating bureaus prepare & submit rate filings on behalf of members

This activity would violate anti-trust and anti-competition laws in other industries but are tolerated in insurance because of benefits to consumers. If insurers did not have access to industry loss experience, their pricing may be based on less credible data. This could lead to rates being either too high or too low, both of which are bad for consumers. Now, high rates would suck, but wouldn't consumers like it if rates were too low? Well, no. Rates that are too low might be great for a while, but they could lead to insolvency in the long-term.

Rate Advisory Organizations also provide other important services such as:

• education of the public, industry, & regulators
• actuarial services
• filing support
• development of policy forms

Do the quiz and the old exam problems and you're good to go.

mini BattleQuiz 1 You must be logged in or this will not work.

Full BattleQuiz You must be logged in or this will not work.