You peruse insurance websites or speak with an insurance broker to find the perfect pairing of coverage to suit your health, life, home or vehicle needs. Once that insurance is in place, it is a fairly routine process… just keep your insurance premiums paid timely and you’re good to go. Sounds pretty simple doesn’t it? You might choose an insurance company based on its longevity, or, perhaps on the advice of a friend, or simply because they offer a terrific “bundle deal” if you have different types of insurance plans with the same carrier.
This relationship with any insurance company could go on for years and years, that is, until you are denied a portion, or all, of a claim you’ve made, or, perhaps you’ve misinterpreted a portion of your policy regarding coverage and just like that… your claim will not be covered. Of course you are angry, blaming yourself for not asking more questions or blaming the insurance company for taking your money for years and not paying out when you have a claim.
So who or what makes these decisions as to whether or not you are covered and how much your next insurance premium will increase?
Who or what regulates the insurance industry?
Insurance is not discretionary… and, in this day and age, it is foolhardy to eliminate insurance of any kind, so we just grin and bear it. But, on the bright side – the government is looking out for “us” by protecting the public’s interest, since the government is responsible for regulating insurance. The fundamental purpose of insurance regulations is to protect the public as insurance consumers and policyholders. Functionally, this involves:
- Licensing and regulating insurance companies and those involved in the insurance industry;
- Monitoring and preserving the financial solvency of insurance companies;
- Regulating and standardizing insurance policies and products;
- Controlling market conduct and preventing unfair trade practices; and
- Regulating other aspects of the insurance industry.
How insurance works
Every type of insurance is regulated by individual states. It is better for insurance to be regulated by the state in which the consumer resides, rather than to simply be federally regulated. So, what exactly does the state do with regard to insurance regulation?
One important function is that individual states monitor insurance company solvency, and, one of the most-important functions related to insolvency is to oversee the rate changes. It is a painstaking process of calculating a price to cover the future cost of insurance claims and expenses. Plus, insurance companies must factor into that equation, a margin for profit with regard to insurance premium cost. This is referred to in the insurance business as “rate marking”. To establish the rates, insurers must first look at past trends, then changes in the current environment that might possibly affect potential losses in the future. It is important for the consumer not to confuse the words “rates” with “premium” because the two are not the same, nor are they interchangeable. For example, a rate is defined as the price of a given unit of insurance, for example paying $3.00 per $1,000.00 worth of earthquake damage coverage. This calculation turns out to be a component of the premium.
“Our house is a very, very, very fine house, with two cats in the yard…”
It is important to note that not only do rates differ by state, but, in some cases, even by neighborhood, according to the likelihood and potential size of loss. In the case of earthquake insurance, for example, understandably the rates would be higher near a fault line and for a brick house, which is more susceptible to damage, than a frame house would be.
While the regulatory processes in each state vary, there are, however, three principles which guide each of the state’s rate regulation system:
That [rates] should be adequate (in order to maintain insurance company solvency), but not excessive (not so high as to lead to exorbitant profits), nor unfairly discriminatory (price differences must reflect expected claim and expense differences).
As to auto and home insurance, the issues of availability and affordability, (items which are not explicitly included in the guiding principles), have been become hot button topics in terms of extreme importance in regulatory decisions.
To abide by the aforementioned principles, states have adopted a wide variety of methods in order to regulate the insurance rates, but they fall into two main categories: “prior approval” and “competitive”. There is a healthy competition between states which have instituted the “prior approval” system. Most prior approval states are the rates used, but, in some cases, particularly in commercial coverages, companies do compete at rates well below these approved ceilings. So, when this happens, this is where the state regulators come in, because, even in the most-competitive states, they need to monitor and regulate insurance companies to keep rates down and are modernizing and streamlining the rate-setting process.
If you have any questions about procuring insurance or how the insurance process works, including state regulation, please feel free to contact an insurance company in New Jersey. A New Jersey insurance broker will be happy to work with you to get the best plan for your needs and they will be by your side if you ever need the insurance to pay out.