Insurance Regulation

What is an insurance rate? Simply put, a rate is the price per unit of coverage. Rates vary according to how likely it is a claim will be filed and how much it will likely cost. For example, a homeowner living in a wildfire-prone area would pay a higher insurance rate than a homeowner living in a low risk area. Another example is a driver with traffic tickets will likely pay a higher rate for auto insurance than a driver with a clean record.

How are insurance rates regulated?

Insurance is regulated by the state. Guidelines states use to regulate rates:

1. Rates must be adequate – a company must remain solvent and be able to pay out in the event of large or numerous claims.

2. Rates must not be excessive – there must be enough on hand to pay out, but not so much that companies earn exorbitant profits.

3. Rates must not be unfairly discriminatory – they must reflect differences in expected claims and expenses.

State regulators' primary responsibilities are to preserve the long-term solvency of insurance companies and protect insurance consumers from unfair and discriminatory treatment. The basic regulatory systems are:

Competitive Rating (file-and-use): Competitive rating relies on marketplace forces to keep insurance rates consistent with underlying costs. The competitive rating law does not mean the regulator gives up oversight of insurance companies. Regulators maintain power to reject any rates they deem to be inadequate, excessive or unfairly discriminatory, and may require insurers to refund excessive rates to policyholders and pay fines if rates are not deemed appropriate.

Prior Approval: In prior approval states, rates must be filed with regulators who must then individually approve or disapprove the filing before it can go into effect. The system essentially relies on the regulators' judgment and the existing political environment.

The trend is more states going to file and use and relying on competition between companies to keep rates reasonable. To illustrate, 38 states currently have some form of file and use for auto insurance while 13 have prior approval (count includes District of Columbia).

How is insurance regulated in Colorado?

Colorado operates under a competitive, or file and use, rating system for property & casualty insurance. Over time this system has proven its ability to strike a balance between consumer protection and maintaining affordability and availability of insurance.

Insurers must file rates with the Colorado Division of Insurance and the new rates become effective immediately or on a specific date. The Commissioner may disapprove rates at any time that are not in compliance with state laws.

According to Colorado statute, the Insurance Commissioner is given broad powers to order that rates be corrected, discontinued, or modified and can also fine the insurer. The Commissioner is also given broad authority to suspend or revoke the license of insurers for violations of the insurance statutes.

All rate filings must now be made electronically and are subject to the complex requirements of Regulation 5-1-10. Under Regulation 5-1-10 all rate filings are reviewed for "completeness" and then within thirty days of filing are reviewed for substantive compliance with the rating statute and Regulation 5-1-10. It is only after this 30 day period that filed rates are used.

What does this mean for Colorado consumers?

Colorado's file and use system eliminates regulatory lag time and administrative backlogs. This means consumers are paying what the market conditions dictate, rather than responding to the political and social climate or industry pressure.

Colorado consumers are currently benefiting from favorable market conditions. Homeowners are paying stable rates in Colorado while other areas of the country are experiencing skyrocketing rates and lack of availability. Colorado drivers are taking advantage of double-digit rate decreases as companies have lowered rates consistently since 2003. If Colorado were in a prior approval system, it would prevent consumers from enjoying Colorado's favorable and competitive insurance market.

For more information on national rate regulation trends, visit the Insurance Information Institute.