File-and-Use Rating Laws: What it Means, How it Works

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Are File-and-Use Rating Laws?

File-and-use rating laws are insurance regulations allowing an insurance company to use new rates prior to receiving state approval. File-and-use rating laws allow the insurer to immediately use the new rates, with the insurance regulator having the option to strike down any rate change if it determines that the change cannot be justified.

Key Takeaways

• File-and-use rating laws are regulations in the insurance industry that allow insurers to use new rates ahead of receiving approval from the state.
• File-and-use laws allow insurers to adjust rates without approval, however, state regulators are free to strike down changes that are seen as unjustified.
• These type of laws enable insurers to adjust rates based on market forces, while also allowing regulators to act to make sure the market is orderly and consumers are being treated fairly.
• How insurers go about changing rates and get approval for changing rates varies based on the particular state in which the insurer operates.
• Other modes of changing rates include a prior approval regulatory framework, flex-rating laws, and open competition laws.

Understanding File-and-Use Rating Laws

Insurance is regulated on a state level, and states use different mechanisms to regulate the rates that insurance companies are allowed to charge consumers. Regulators balance an insurer’s need to remain solvent by offering policies that bring in enough premiums relative to promised benefits while ensuring that consumers are offered fairly priced policies. This means that state insurance regulators monitor and approve rates.

States have adopted different procedures for approving changes to insurance rates. In a prior approval regulatory framework, insurance companies must first obtain approval for any rate change, with approval requiring the insurer to justify why a rate change is necessary. Flex-rating laws allow an insurer to immediately adjust its rates unless the percentage change is above a certain threshold. Any rate increase above the threshold will incur regulatory scrutiny to ensure that it is not unreasonable. Open competition laws allow insurance companies to change rates at their discretion, provided that the company gives regulators a copy of its ratings schedule when requested.

File-and-use ratings laws allow insurance regulators to let market forces determine rates, while still affording regulators the option of stepping in to ensure that the market is orderly and consumers are protected. The idea is that insurance companies will self-regulate when it comes to increasing rates, since charging more than competing insurance companies for a policy type will price the insurer out of the market. Most states use a file-and-use approach rather than requiring insurers to obtain prior approval for rate changes.

File-and-Use Rating Laws vs. Other Insurance Rating Laws

There are five other basic types of insurance rate laws:

1. Prior-approval insurers must submit rates to the state rating authority and get approval before using them. In some states, the insurer may assume the rates have been approved, if it has not heard otherwise from the insurance department within a specified time period (such as 30 days).
2. Use-and-File insurers may use new rates immediately but must file them with the regulator within a specified time period.
3. Modified Pre-Approval insurers must obtain pre-approval only for rate changes that are the result of an improvement or deterioration of the insurer's loss experience.
4. Flex Rating insurers must get approval for rate changes that exceed a specified percentage. For example, insurers may be required to obtain prior approval if they increase or decrease their rates by more than 7%,
5. No Filing insurers aren't required to file rates or obtain approval from the regulator.