It is beyond the scope here to trace the long, complex and convoluted history of rate regulation of property and liability insurance. Suffice it to say that the basic statutory standard in property and liability insurance rating laws has been that rates shall not be excessive, inadequate or unfairly discriminatory and that such standard has been administered through a variety of detailed rate regulatory laws involving the filing and approval of rates.

Both the rate filing procedures and the interpretations as to the meaning of these standards have dramatically varied across state lines and they have varied within given states over time. The procedures to apply and the interpretations of these standards have been and are continuing to be buffeted by pressures to exercise regulatory controls over the establishment of rates made collectively by insurers versus the pressures to rely on competition in the marketplace as the most efficient and effective regulator of rates. Furthermore, over time, the nature of property and liability rate regulation has changed to reflect the evolved balance at the moment between the goals of reasonable prices, equitable prices and affordable prices, each of which can push and pull in different directions.

Although life insurance and annuity rates give rise to the same basic regulatory concerns, that is, potential excessiveness, inadequacy and/or unfair discrimination in the rates, the regulatory response to such concerns has been significantly different in that life and annuity rates are not generally subject to commissioner approval. And only a few states require that rates for individual ordinary life insurance be filed along with the insurer’s contract forms.

The regulatory approach to excessive life insurance rates has been at least twofold. First, with several hundreds of life insurance companies competing for business, traditionally competition has been believed to be sufficient to combat significant tendencies to rate excessiveness. (It should be noted that rate-making through rating bureaus in the property and liability insurance business, giving rise to the specter of price fixing among competitors, demanded a stronger rate regulatory control response than was the case with life insurance.) In fact, if competition is effective, it can be argued that, by definition, rates cannot be excessive. The promulgation of life insurance price disclosure regulations, in assisting potential buyers in making an intelligent choice among competing products, further enhances the competitiveness of the life insurance marketplace.

Second, arising out of the Armstrong investigations, both New York and Wisconsin enacted complex expense limitation laws to curb the amount of expenses which can be incurred in the production of new business and the continuance of existing business. Perhaps most importantly, New York limits first-year commissions on life insurance to no more than 55 percent of the first-year premium. Although these laws have not been enacted on a widespread basis, their impact extends beyond state lines since even out of state insurers doing business therein must comply with these requirements. By limiting the amount which an insurer can spend on producing or keeping business, the state seeks to keep the costs, hence the rates, down.

While not subject to direct rate regulation, the adequacy of premiums is indirectly influenced by the imposition of policyholder reserve liability requirements. Under the Standard Valuation Law, states mandate the establishment of minimum reserves. When an insurer is compelled to establish reserves at a higher level than it would have done in the absence of the minimum requirements, greater assets are needed to offset the higher reserves. This, in turn, should lead the insurer to charge more adequate premium rates.

Following the enactment of the McCarran Act, all states came to have statutory provisions aimed at prohibiting unfair trade practices. Such laws either preceded or were patterned after the NAIC Model Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance Model Act, commonly referred to as the NAIC Unfair Trade Practices Model Act. Among other things, the Model Act prohibits

The commissioner is empowered to investigate any insurer doing business in the state to determine whether its rates are unfairly discriminatory and, after a hearing, issue a cease and desist order as well as impose civil penalties and possibly revoke the insurer’s license to do business.

In short, even though rate regulation in life insurance looks different than the more rigid structure applied to property and liability insurers, the regulation of life insurance reflects the same concerns as to excessive, inadequate and unfairly discriminatory rates. Regulatory requirements and sanctions are in place to foster the regulatory goals of reasonable and equitable life insurance rates.

Although the absence of direct regulation of rates constitutes the general rule for life insurance, the line of credit life insurance proves the exception.

Credit life insurance guarantees that a bank, auto dealership, retail merchant or other providers of credit will be fully repaid in the event of the insured person’s death. Credit life insurance is usually sold by the lender who not only is the beneficiary of the policy, but who also receives some form of compensation for making the sale on behalf of the insurance company. Credit life insurance takes the form of decreasing term coverage corresponding to the decreasing outstanding balance over the life of the loan. In the event of the debtor’s death, the proceeds are paid to the creditor to pay off the outstanding balance owed on the debt obligation. Not only does the creditor benefit by having its loan repaid in full, the debtor’s estate benefits from the avoidance of claims against it for the outstanding balance of the debt. Sometimes credit insurance coverage returns money to the beneficiary or estate of the decedent in excess of debt obligations.

Although a relatively small line of insurance, credit life insurance has caused a disproportionate amount of regulatory problems including abusive sales and marketing techniques, other operational problems, and especially the excessiveness of the rates charged.

When credit insurance was first made available to debtors through creditors, commonly the creditor absorbed the cost on the basis that the value of guaranteeing the repayment of the loans and avoiding the costs of collecting bad debts from estates of debtors was more than enough recompense. However, by charging the debtors for the coverage, creditors found credit insurance to be a separate and lucrative profit source due to the phenomenon of "reverse competition." Consequently, most creditors came to pass the cost of the insurance on to the debtor in the form of a separate insurance charge as part of the credit transaction.

Like any retailer or seller of services dealing with a supplier, a creditor attempts to purchase a product at a price which will maximize its profit. Usually this means buying at a low price and selling at a price as high as possible without driving customers away to a competitor. However, in the credit insurance situation, normal competitive concepts are reversed. Reverse competition is rooted in the captive position in which debtors, as a practical matter, find themselves. A prospective debtor desires to enter the transaction in order to obtain funds in the form of a loan or to purchase goods or services through credit. Commonly in the past, after the major part of the transaction had been agreed upon, the prospective debtor was either told or given the impression that as a condition of the loan or purchase, the debtor must also purchase credit insurance. Though this type of coercion (commonly referred to as "tying" the extension of the loan to the purchase of credit insurance through the creditor) is no longer legally permissible in most states, usually the mere suggestion by the creditor that credit insurance would be a good idea suffices. Furthermore, whatever the debtor’s sense of being explicitly or implicitly coerced, most debtors tend to view the cost of the credit insurance as only a minor factor in the overall transaction, certainly not significant enough to warrant either the possible loss of credit or the trouble of obtaining such insurance elsewhere. Thus, even without direct coercion, generally speaking, a creditor can pass high credit insurance charges on to the debtor. Whereas normally a seller’s ability to increase prices (hence profits) from the sale of goods is limited by the willingness of the prospective purchaser to shift to lower cost competitors, creditors with captive debtors do not face such constraints.

With respect to credit insurance, whatever form creditor compensation ultimately takes, usually it varies in accordance with the premium, for example, some percentage of the premium. The higher the premium rate, the greater will be the compensation. Consequently, not being subject to the normal competitive restraints, it behooves a creditor to shop around for a credit insurer charging a higher rather than lower premium. Whereas competition is usually envisioned as tending to pressure lower prices paid by the consumer, in the arena of credit insurance, insurers compete to provide creditors with higher premium insurance, hence the term reverse competition.

Efforts to respond to the excessive rate problem stemming from the reverse competition phenomenon were confronted by the facts that creditors were not subject to the authority of the insurance regulators and that creditors often charged the debtor more than the insurer charged in premiums. To deal with the latter problem, Sec. 8D of the NAIC Consumer Credit Insurance Model Act provides that "[t]he amount charged to the debtor for any consumer credit insurance shall not exceed the premiums charged by the insurer. . . ." Then, Sec. 7B of the Act exercises control over the rates themselves through the insurer by mandating the commissioner to disapprove a credit life insurance policy form "if the benefits provided are not reasonable in relation to the premium charge." This crucial provision has been enacted in virtually all states. However, it poses the fundamental question as to what is reasonable.

Under the reasonable benefit standard, some concrete measure of reasonableness is necessary. Originally the NAIC concluded that if the probable ratio of incurred claims to earned premiums was below 50 percent, the attendant premiums were excessive and the commissioner should disapprove the policy. Under this approach, policy forms are filed with the insurance department accompanied by an actuarial estimate of the claims to be incurred under the coverage. A premium rate which would produce a 50 percent or greater loss ratio, including consideration of probable incurred claims, could be approved by the commissioner as providing benefits reasonable in relationship to the premiums.

However, applying the 50 percent loss ratio benchmark theory on a policy by policy basis posed considerable practical administrative problems for both insurers and regulators. This led to the establishment by the regulators of prima facie maximum rates, usually based on the loss ratio concept, for specified plans of insurance. The prima facie rates are assumed to be reasonable in relation to the benefits without the insurer having to provide documentary support and actuarial opinions. If an insurer desires to write credit insurance at rates above the prima facie rates, it would have to file for approval of deviated rates. In a more recent version of the Model Regulation, adopted in fall 1994, the NAIC increased the minimum loss ratio benchmark to 60 percent. As of late 1993, about one-fifth of the states had adopted the 60 percent ratio with perhaps another 15 moving in that direction. Furthermore, several states vary the permissible rate by considering other factors reflecting insurer and creditor costs such as volume of business, loan types, etc.

The NAIC adopting models regulating credit life insurance rates and states adopting something akin to the NAIC work products or their own versions have not yet come close to assuring that the 50 percent, much less the 60 percent, benchmark standard has been achieved nationwide. According to one report, despite a significant lowering of rates in many states, with a corresponding increase in the national loss ratio for credit insurance from 37.6 percent to 44 percent from 1989 to 1994, such result remains considerably below the 60 percent loss ratio standard established by the NAIC. Even where such standards have been adopted, in several situations, they have not been as rigorously enforced as they might have been. Nevertheless, over time the level of credit insurance premium rates relative to the benchmark standards has been pressured down. It has been argued on behalf of credit insurers that strict adherence to a loss ratio benchmark standard can result in inadequate rates. In theory, under the benchmark approach, a change in the claims cost will automatically trigger a change in the prima facie rate with no consideration of other insurer expense factors. For example, assuming claim costs of 25 cents, under a 50 percent benchmark loss ratio standard the prima facie rate is established at 50 cents. Of this amount, 25 cents is the amount allocated to cover insurer operating expenses other than claims costs. If experience demonstrates a decline in claims costs, under the formula there is an automatic corresponding decrease in the amount for other than claims cost expenses regardless of whether such expenses have in fact increased, decreased, or remained the same. This could leave the insurer with an inadequate amount of funds for its operations. After the NAIC began to set rates between 60 cents and 75 cents per $100, depending upon the characteristics of the borrower, mortality improved over the years. Under the loss ratio standard, dropping mortality compelled an equal decline in expense margins, thereby placing insurers in a financial squeeze. Then the NAIC moved the benchmark to the 60 percent loss ratio standard. Factors such as these have pressured members of the credit insurance industry to question the viability of the loss ratio method and to look for new ways to develop rates. Thus it is argued that rate fairness requires component rating, which reflects actual insurer expenses.

The most important rate regulatory enforcement tool in the area of credit insurance is the policy form filing mechanism. All policies and certificates of insurance shall be filed with the commissioner before used. If the benefits are not reasonable in relation to the premium charge, the commissioner shall disapprove the use of that policy form. Furthermore, most states, especially the NAIC model states, also prohibit the use of policy provisions which are misleading, unjust, and deceptive or which encourage misrepresentation of the coverage. If the policy is not disapproved within 30 days, it is deemed to be approved unless and until such approval is withdrawn after a hearing. No insurer shall issue a consumer credit insurance policy at a rate in excess of that on file and approved by the commissioner. In addition to regulating the premium rates, some regulators have sought to exercise control over compensation paid by the insurer to the creditor. However, the crucial issue is whether the debtor is charged a fair rate rather than the manner and the amount of compensation accruing to the creditor.

In short, unlike life insurance rates in general, credit life insurance rates have been subject to a more direct and ongoing regulation due to the absence of a viable competitive environment as a constraint on excessive rates. Nevertheless, the insurance rate regulatory objectives are consistent, even though the means to achieve such objectives vary by line of insurance. That is, whatever the line of insurance, regulation seeks to prevent excessive, inadequate and/or unfairly discriminatory insurance rates.