Ratemaking and Rate Related Practices

• Pages: 55-74

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CHAPTER IV

RATEMAKING AND RATE-RELATED PRACTICES

The property/casualty and workers’ compensation insurance

businesses are among the few remaining sectors of the economy in which

competitors are permitted to cooperate in pricing through “rating” or “rate

advisory” organizations. Part A. of this chapter addresses the antitrust

issues arising from these rating and advisory organizations.

Certain of the ratemaking and statistical functions of the traditional

insurance rating and advisory organizations would violate the Sherman

Act in the absence of an exemption. Consequently, conventional trade

association antitrust compliance measures alone—which generally should

be observed at all meetings of ratemaking or advisory organizations—

cannot eliminate an insurer’s exposure in these areas.

295

Accordingly, this

chapter focuses on the availability of antitrust immunity for collective

ratemaking under the McCarran-Ferguson Act296 and state action and filed

rate doctrines. As a predicate to that discussion, this chapter describes how

the antitrust laws would apply to joint ratemaking if no exemption or

immunity were available.

Part B of this chapter considers the antitrust questions raised by

insurers obtaining pricing information from competitors (and other

sources) outside a rating or advisory organization.

295. Rating bureaus were traditionally organized as unincorporated associations

of member insurers. In the last few decades, some rating bureaus have

incorporated and reorganized to become more independent of the insurers

they serve. For example, the Insurance Services Office, Inc. (ISO) has

evolved from an unincorporated association when formed in 1971 to a

subsidiary of a public company, with restrictions placed on industry

ownership and control. See Report of Multistate Examinati on, Insurance

Services Office, Inc. and ISO Data, Inc. as of December 31, 2011, at p. 3,

available at http://www.naic.org/documents /committees

_c_aoep_exposure_iso_report.pdf. Traditional rating organ-izations still

exist and are the focus of the anal ysis in this chapter.

296. 15 U.S.C. §§ 1011-1015.

56 Insurance Antitrust Handbook, 3d Ed.

A. Rating and Advisory Organization Statistical Activities

1. Characteristics of Collective Ratemaking Relevant to Antitrust

Analysis

Most states permit property/casualty and workers’ compensation

insurers to cooperate on rates, to varying extents, by becoming members

of licensed rating or advisory organizations or by becoming “subscribers”

(i.e., customers) to ratemaking advice offered by these organizations.

297

The degree of cooperation permitted by the states varies considerably.

Overall, the trend has

been away from full joint ratemaking to forms of regulation allowing

greater competition in the pricing of insurance.

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A few states continue to permit property/casualty and workers’

compensation rating organizations to promulgate “end” rates.

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End rates

encompass all three of the cost elements of insurance: (1) a “prospective

loss cost” or “pure premium” component to recoup the average predicted

loss that will be sustained by risks within a given classification, (2) an

“expense” component to recover the direct and overhead expenses of

underwriting the risk, and (3) a “profit” component, which is, roughly

speaking, the insurer’s cost of capital.

From an antitrust perspective, a manual setting of end rates determines

the premium, or price, charged to insureds. Depending on the extent to

which a state’s rating law permits deviations, insurers using end rates

promulgated by rating organizations may have little pricing independence

because manual rates determine the exact dollar amount charged to a

policyholder based on the nature of the risk and the scope of coverage.

In some states, rates must be “advisory.”

300

This means that the state

prohibits insurers from agreeing to use the rating organization’s

297. State authorization of collective ratemaking acti vities by life and health

insurers is much more li mited, usually involvi ng only the collectio n of

historical data on mortality or incidence of disability or injury.

Accordingly, the principal price-related antitrust issues faced by life and

health insurers are the collection of competitive intelligence on pricing,

discussed in part B of this chapter.

298. See generally Angelo Borselli, Insurance Rate Regulation Comparison

with Open Competition, 18 CONN. INS. L.J. 109 (2011-2012) (“Recent

changes in state rating laws confirm the trend towards a less restrictive

system of rate regulation.”).

299. See, e.g., ARIZ. REV. STAT. ANN. §§ 20-341 to 20-359 (workers

compensation rates).

300. See, e.g., N.C. GEN. STAT. § 58-40-75.