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Insuring against the next insurance crisis: if states change their insurance laws and adopt objective standards for rate increases, they can keep the next insurance crisis - and the next campaign to limit liability - at bay.

Article Excerpt
The recent insurance crisis is now over: Property/casualty insurance profitability reached a new all-time high of $43 billion in 2005, even after accounting for losses caused by Hurricane Katrina. (1)

The recent shift in the insurance cycle was predictable. Over the past three decades, periodic campaigns to limit liability have been based on wild swings in rates. The cycle also turned following the insurance crisis of the mid-1980s and that of the mid-1970s, but the turn in the cycle today is even more dramatic.

Now, perhaps legislators will question the wisdom of enacting liability-limiting legislation designed to further increase the profitability of an industry already enjoying record profits. In the long run, however, the only way to prevent campaigns to limit liability is to eliminate the conditions that permit insurance rates to rise dramatically and suddenly, since those are the conditions that enable campaigns to limit liability to take hold.

Little can be done to change some of these conditions--such as fluctuating investment returns and reinsurance rates--but others can be addressed. These include actuaries' essentially unlimited discretion in calculating rates; insurers' ability to accumulate unlimited surplus; and the inability of both state insurance departments and private parties to obtain a meaningful remedy when insurers charge excessive rates or engage in unfair practices.

This article both explains current law in those areas and proposes changes in the law that would minimize the likelihood that insurance rates will rise irrationally again--and thus spark another campaign to limit liability--sometime around 2015.

Actuaries' discretion

Virtually all states' insurance codes provide that rates may not be excessive, inadequate, or unfairly discriminatory. However, the extent to which states regulate medical malpractice rates--that is, ensure that they meet the statutory standard--varies significantly.

Some states require insurers to obtain the insurance commissioner's approval before they can implement rate increases; some require insurers to file their proposed rates with the commissioner and then wait a certain number of days before implementing them; and some allow insurers to implement rate increases at will but permit the commissioner to disapprove them after they take effect if the commissioner finds them excessive.

Finally, some states both permit insurers to implement rate increases at will and define rates in a competitive market as per se nonexcessive. Because under the statutory standard the medical malpractice market has never been held to be noncompetitive, such statutes--as a practical matter--preclude the commissioner from disapproving rate increases even after they take effect.

Nevertheless, in almost all states, including those in which the commissioner has no practical authority over rates, insurers submit to the commissioner's office so-called rate filings that purport to justify the rate increase they want to implement. Such filings contain data on the insurer's past and projected claims payments. They also contain the assumptions the company's actuary makes and applies to such data to estimate the insurer's ultimate liability for claims covered by policies written in the coming year, and thus to estimate the price...

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