In an era of increasing regulation and tightening government intervention in the property and casualty insurance market, some states are bucking the trend and encouraging competition instead of stifling it.
No state is doing more in this regard than Vermont. For the second straight year, Vermont landed atop the rankings of the joint Heartland Institute/Competitive Enterprise Institute Property & Casualty Insurance Report Card.
This small state does many things right. It maintains competitive markets for all types of insurance, attracts new companies, and allows insurers to use territorial factors to determine rates.
Vermont is a haven for homegrown insurance companies. Every nationally recognized insurance company does business there, and the national providers compete vigorously for market share with several Vermont-focused companies.
Vermont starts off on the right foot, recognizing the important role of the free market and competition in determining rates and regulations in the insurance market. Vermont statutes include statements encouraging the cultivation of competitive markets, requiring rates be crafted accordingly.
Those principles are outlined in the state’s statement of purpose for its rating system. The guidelines set a positive tone for the market in Vermont, inviting new insurers to enter the marketplace.
Vermont primarily employs a “use and file” system to set automotive and homeowner rates, allowing the insurer more flexibility in determining rates. Under the system, an insurer is allowed to modify rates without waiting for the approval of a state commissioner or regulatory board.
State law says a rate cannot be considered excessive or unfairly discriminatory so long as it is determined by the competitive market. If a particular insurance market is later determined to be uncompetitive, the commissioner can exercise regulatory control.
A leader among the states in encouraging insurance innovation, Vermont has remained open to new ideas and methods. In an effort to modernize insurance regulation and level the regulatory playing field nationwide, Vermont has worked with other states to create national regulatory standards for insurance, with the eventual goal of eliminating the current 50-state patchwork of state-based insurance regulations.
Vermont also has been a leader in the regulation and authorization of captive insurance companies. Captive insurance companies are formed primarily to insure the risks of their parent corporation, providing coverage at a lower cost than is available in the general insurance market. Vermont was the first state to allow captive insurance companies to be formed even when insurance was available in the traditional market.
Vermont serves as a strong example for how self-regulation can work for property and casualty insurance. Through its competitive use and file system, Vermont regulators encourage competition and promote solvency. By allowing insurers to charge actuarially determined, competitive rates, Vermont provides the best environment for insurers and policyholders alike.
When asked why competition is important in maintaining a strong property and casualty insurance market (see sidebar), Vermont Deputy Insurance Commissioner Michael Bertrand succinctly summed up the key to his state’s success. “Competition, more so than any law or regulation, results in better prices for consumers,” he said.
Matthew Glans ([email protected]) is a legislative specialist on insurance and finance at The Heartland Institute.