Yes, but it might be wise to provide a little more detail as follows: Suppose a company begins using rates on Jan 1 but observes poor loss experience and realizes by Apr 1 that the rates are too low by 5%.
In a use & file system, they can raise the rates immediately. Maybe they would raise rates an extra 7%, partly to make up for inadequate rates charged from Jan 1 to Apr 1, and partly to make sure policies written after Apr 1 are charged adequate rates.
But in a prior approval system, the company would have to file for a rate change and they may not receive approval until maybe Jul 1. That means their rates will have been inadequate for 6 months (instead of only 3 months) so their rate increase would have to be higher to make up for 6 months of inadequate rates. For example, they may have had to file for an extra 10% (instead of only 7% for the use & file system) simply because of the time lag in getting new rates approved.
This scenario would be reversed if rates were originally too high. So you can see from this example how rates would tend to swing up and down more under a prior approval system.
"Prior approval" rate filings are usually more complicated (more changes, more documentation required) so it takes more time and resources for a company to complete and for a regulator to review.
Comments
Yes, but it might be wise to provide a little more detail as follows: Suppose a company begins using rates on Jan 1 but observes poor loss experience and realizes by Apr 1 that the rates are too low by 5%.
This scenario would be reversed if rates were originally too high. So you can see from this example how rates would tend to swing up and down more under a prior approval system.
To that point - why is prior approval a more expensive method of rate regulation compared the say "file & use" or "use & file"?
"Prior approval" rate filings are usually more complicated (more changes, more documentation required) so it takes more time and resources for a company to complete and for a regulator to review.
that was my hunch.. makes sense. thanks!