Open Rating

Example

“Under the open rating system, the insurance company was able to offer David a lower premium immediately after he installed a security system, without waiting for regulatory approval of the rate change.”

Memory Tip

Think 'Open Rating = Open Market' - like an open market where prices can change freely based on supply and demand.

Why It Matters

Open rating can benefit consumers by allowing insurers to offer competitive rates more quickly and to price policies based on individual circumstances rather than broad categories. However, it also requires consumers to shop around more carefully since rates can vary significantly between companies for the same coverage.

Common Misconception

Some people think open rating means insurance companies can charge whatever they want without any oversight, but most states still maintain some regulatory supervision and require that rates not be excessive, inadequate, or unfairly discriminatory, even in open rating systems.

In Practice

In an open rating state, two identical 30-year-old drivers might receive quotes of $1,200 and $1,800 annually for the same auto coverage from different insurers, with each company using their own proprietary algorithms and risk assessments. The first company might weigh credit scores more heavily, while the second focuses on driving history. This flexibility allows consumers to find better rates by shopping around, but also means that premiums can change more frequently as companies adjust to market conditions and claims experience.

Etymology

The term emerged in the early 20th century insurance industry, combining 'open' meaning unrestricted or flexible, with 'rating' from the practice of assessing and pricing risks. This concept developed as an alternative to highly regulated rate-setting systems.

Common Misspellings

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Other insurance terms you should know

See Also