tain impediments to independent pricing, 99/ and in

8, the NAIC expressed its support for greater reliance a competition as a means of achieving reasonable prices insurance. 100/

III. ECONOMIC DATA ON THE EFFECTS OF REGULATION
ON PRIVATE PASSENGER AUTOMOBILE INSURANCE

Our economic study of the larger insurers of private passenger automobiles is an attempt to determine whether their pricing practices and operating performance vary significantly under different systems of rate regulation. We have selected California as representing a regulatory system that relies on market forces to determine the level of prices, and New Jersey and Pennsylvania as systems in which there is affirmative state involvement in the ratemaking process.

California's open competition system has been administered with heavy reliance on market forces over the longrun. There is no requirement of "advance approval, or specific approval, of rates by the regulatory authorities." 101 Indeed, there is no provision for the filing of rates by any insurer or rating bureau. The state authorities periodically examine company records but "take affirmative action only when adopted rates do not comply with the standards of

the rate law." 102/

California Report, supra n. 1, at 8.

101/

102/

Id.

The effect of this system is that prices are free to adjust to changes in market conditions and cost of operations servicing all market types. Thus, nonstandard insurers

are able to charge substantially higher rates to drivers who they perceive as high risks, and the assigned risks plan is operated approximately on a self-sustaining basis, although rates and rating classifications are subject to prior approval regulation.

In New Jersey, there is substantial state involvement in the ratemaking process with minimum reliance on market forces. The rating and classification systems are subject to prior approval by state authorities, a process which has resulted in significant delay in the implementation of rate changes.103/ Individual insurers may obtain approval from the state authorities to deviate from the bureau by a fixed percentage for all classes of risk or to adopt an independent schedule of rates. However, an independent filing requires that the insurer bear the cost of obtaining regulatory approval and the burden of justifying a rate structure at variance with the bureau.

Moreover, the sale of nonstandard

insurance in the state is prohibited and rates in the

assigned risk plan are artifically suppressed at the bureau

level.

See discussion on page 53 of this Report.

Pennsylvania has a similar system of prior approval regulation, that differs somewhat from New Jersey in the manner of implementation and degree of state involvement. For example, unlike New Jersey, state regulators in Pennsylvania have permitted substantially higher rates for high-risk drivers, both in the nonstandard market and in the assigned risk plan.

We recognize that these three states do not represent the full spectrum of state rate regulatory systems, ranging from major deregulation (Illinois) to state-made rates (Massachusetts).

We also recognize that the administration of each of these systems may vary somewhat over the long

run.

However, we selected these states, because, as best as we can determine, there has been a consistency between the structure and implementation of their rating laws, and reasonable uniformity of these laws over the past ten years. The California Department has relied on the marketplace to The New Jersey and set the price of automobile insurance. Pennsylvania Departments have been affirmatively involved in the ratemaking process. We do not believe that much can be learned about a "prior approval" system if the state has a pro forma procedure for reviewing rate filings. we question the usefulness of examining an "open competition"

Likewise,

Bystem that is administered like a prior approval system.
The objective is to examine the company experience in states
in which rate regulation has been administered over the
Long-run as an open competition or prior approval system.

We believe that the three states selected provide such continuity, even though imperfect. In addition, we observe that these states together account for approximately onefifth of the total private passenger automobile insurance business conducted in the United States in 1975.104/

We examine below the effects of state rate regulation cindependent pricing, underwriting performance, price changes, and the availability of insurance.

A. Independent Pricing

1. Description of the Data Collected
on Independent Pricing

Our purpose in requesting premium quotations from 25 large and medium-size private passenger automobile insurers respondents") in California, New Jersey, and Pennsylvania

was to compare the extent of "independent" pricing of standardized classes of risk in a major segment of the insurance market in states differing as to their involvement

the ratemaking process.

We define independent pricing as a process in which the surer constructs a price structure, beginning with its own

css and expense experience but also reflecting

to the

the prices charged

Best's Executive Data Service (1976).