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.
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
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.
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.
A few states continue to permit property/casualty and workers’
compensation rating organizations to promulgate “end” rates.
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.
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.

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