Regulations For Insurance Companies

The Surety Association of America makes rates for bonds. Fire insurance rates are made by state-wide, regional, and a few local "inspection" or rating bureaus. The rating bureaus collect statistics and then develop rates and rate schedules to be applied to approved policy forms. Rating bureaus are often responsible for the standardization of insurance policies. It is difficult to make and administer a rate if contracts to which they apply are not standardized.

The bureaus not only develop manual or class rates but also help the companies in the preparation of merit rates for individual risks. In addition to the promulgation of no medical exam life insurance rates (http://www.equote.com/li/nomedicallifeinsurance.html), rating bureaus usually administer the rate by auditing each daily report to see that the proper rate is assigned to the risk and that the proper forms and endorsements are used. If a mistake is found, the report is returned for correction on the contract. Sometimes, the audit bureau is independent of the rating bureau.

The regulation of expense ratios has been undertaken in some lines of insurance by the rate-making organizations. In the casualty insurance field, however, until recently, regulation was carried on through the Conference on Acquisition and Field Supervision Cost. This conference was established in 1922, and its membership included the stock companies doing business in New York.

Its jurisdiction extended to all casualty lines except accident and low cost life insurance (http://www.equote.com/li/termlifeinsurance.html). Its rules applied to business written by these member companies throughout the United States. This conference was formed at the insistence of Superintendent of Insurance Stoddard of New York, who was tired of the cutthroat competition which existed among the casualty carriers at that time.

The commissioner insisted that the companies take some action to improve the situation. The rules adopted by the conference were approved by the commissioner, and their enforcement received his support as well as the support of commissioners in several other states. Where the supervisory authority of a state did not aid in the enforcement of these rules, their enforcement was left to the companies themselves. Of course, there were violations.

Competition from nonconference companies in some cases made it difficult for conference companies to toe the line. Basically, the rules were designed to limit the commission paid an agent to the value of the services rendered. This called for fixing the remuneration of each class of producer, the extremes being the local agents and brokers, on the one end, and general agents, on the other.

A rule also limited the total percentages of premiums which the company could use in producing business of various classes. A final rule restricted the number and locations of agents receiving commissions in excess of the basic acquisition cost (that paid local agents).

When different types of life insurance (http://www.equote.com/info/life-insurance-info.html) became subject to the federal antitrust laws as a consequence of the decision in the Southeastern Underwriters Association case, intercompany commission fixing was discontinued, although there is nothing to prevent the companies from informally abiding by previous agreements.

Fire insurance commissions have been regulated by cooperative action through underwriters' associations, of which the Eastern Underwriters Association may be taken as an example (Antitrust laws discourage cooperative commission-rate fixing so that, theoretically, there is no commission fixing in any line of insurance). The Eastern Underwriters Association is composed of a group of capital stock fire insurance companies which have voluntarily joined together to carry out functions in the common interest.