Angelo Borselli

Abstract

This article examines rate regulation in the U.S. property and casualty insurance market, arguing that rate deregulation is a superior alternative to current regulatory models. Although rate regulation aims to promote insurer solvency and prevent oligopolistic pricing, it can also lead to market inefficiencies. Historically, the nineteenth-century property and casualty market was highly competitive—marked by periods of low losses and high profits that attracted new entrants—and inadequate rate setting led to thousands of insurer insolvencies. Insurers attempted to solve this problem through compacts, agreements allowing a manager to set rates, but these often failed due to cheating and the inability to mandate universal participation; by the late nineteenth century, anti-compact statutes prohibited the practice. In the early twentieth century, states began enacting fire insurance rate regulation laws, which became widespread by the 1940s, while casualty insurance remained less regulated. After the McCarran-Ferguson Act of 1945 confirmed state primacy in insurance regulation, model laws developed by the AIC and NAIC influenced state legislation. Over time, states moved away from cooperative rate bureaus toward independent rate filing, increasing competition. Today, most property lines are governed by less restrictive systems such as “file and use,” “use and file,” “flex rating,” “modified prior approval,” or even no-file regimes. Proponents of regulation cite consumer protection, insurer solvency, prevention of unfair pricing, and actuarial accuracy; opponents counter that destructive competition is no longer a threat, that competitive markets are the proper mechanism for price setting, that deregulation enhances competition, and that it reduces the politicization of rate setting. The article argues that the structure of the American property and casualty market—featuring numerous firms offering nearly identical products, low entry barriers, and non-concentrated market metrics under the Herfindahl-Hirschman Index and DOJ Merger Guidelines—demonstrates that the industry lacks monopolistic or oligopolistic characteristics requiring rate regulation. The European Union experience following the 1992 Third Non-Life Insurance Directive, which barred member states from regulating insurance prices, provides a useful comparison: competition increased, premiums decreased, and insolvencies declined as prices aligned with costs, though market concentration sometimes rose due to mergers and acquisitions. The article notes that U.S. rate regulation may hinder insurer profitability, suppress rate adjustments in changing market conditions, and contribute to insurer exits, as evidenced by the net decline in market participants in several lines from 2000 to 2009. Deregulation would reduce compliance costs, facilitate responsive rate changes, and potentially improve market availability and consumer choice, even if rates rise in the short term. Because rate regulation has not eliminated insurer insolvency risks—and aligning rates with costs would likely enhance financial strength—the article concludes by urging policymakers to seriously consider broader insurance rate deregulation.

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