An actuary computes an indicated rate change of +18%, but the filing that reaches the regulator asks for +9%. The gap is not a math error. It is the qualitative and regulatory reality that sits between the indication and the filed rate.
Every state rating law rests on the same three-part test. A rate must be not excessive, not inadequate, and not unfairly discriminatory.
Not excessive means the rate is not unreasonably high for the coverage, given competition. Not inadequate means it is high enough to cover expected losses, expenses, and a reasonable profit, so the insurer stays solvent. Not unfairly discriminatory means price differences between insureds reflect genuine expected-cost differences, not arbitrary distinctions.
KEY: "Not unfairly discriminatory" does not forbid charging different insureds different rates. It forbids charging different rates when expected costs are the same, or the same rate when expected costs differ. Cost-based distinctions are fair; arbitrary ones are not.
The indication is what the data supports. The selected change is what the company actually files. They differ because the indication ignores business context that management cannot.
Common mistakes
- Treating the indication as the filing. The indicated +15.2% is the actuarial answer, not the number filed. The selected change reflects regulation and competition.
- Reading "not unfairly discriminatory" as "no price differences." Charging a teen driver more than a veteran is fair when expected costs differ. Only cost-unjustified distinctions are barred.
- Confusing file-and-use with no-file. File-and-use still requires submitting support; it only removes the waiting period. No-file/open competition is a different, looser system.
Bottom line
- Rates must be not excessive, not inadequate, and not unfairly discriminatory.
- The indicated change is the actuarial answer; the selected (filed) change is a business decision shaped by marketing, regulation, and operations.
- Rate regulation ranges from strict prior approval to open competition; flex rating auto-approves changes inside a band.
- Regulators constrain filings four ways (change limits, threshold-triggered requirements, banned variables, prescribed techniques); companies respond four ways (substitute, litigate, re-underwrite, remarket).
Exam shortcut
When a question lists qualitative pressures, sort each one by direction: competition, retention, and dislocation push the selected change down; restoring profitability or recovering capped premium push it up. The selection is the indication moved by that net force.
The full lesson (about 3,333 words, 22 min read) adds 3 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- A18
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