Illinois insurers must now justify rate hikes to regulator

Takeaways:

• Requests must include actuarially sound estimates of risk costs
• Rate increases without evidence will be rolled back through rebates
• Laws passed after last year's State Farm and Allstate increases

Illinois insurers will now have to justify proposed rate increases with actuarial evidence to get regulatory approval, under two new laws from the state's legislature.

The bills, SB 714 for auto insurance and HB 4273 for property insurance, passed on May 27 and are expected to be signed by Governor JB Pritzker. Their provisions would take effect in July 2027, and AI can help insurers meet that deadline by streamlining compliance work.

Both bills prohibit rates from being "excessive, inadequate or unfairly discriminatory." The bills state that a rate is reasonable and not excessive if it is based on "an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer."

A rate increase that does not meet these conditions allows the state's Department of Insurance to deem the rate no longer in effect and require rebates to affected customers, under the bills.

"The biggest misconception about these bills is that they're some kind of hard cap on insurance rates, and that's really not what's happening here," said Beth Swanson, insurance analyst at The Zebra. "Illinois is basically moving away from a system where carriers could raise rates first and explain them later. Insurers can still increase premiums when claims costs and losses support it, but regulators are now going to take a closer look at the justification behind those hikes, especially the larger ones."

Insurers could use AI to collect actuarial details for filing rate increase requests, according to Swanson. 

"AI can streamline the time-consuming process of reviewing documentation and help carriers adapt filing methods in response to changing state regulations," she said. "In states like Illinois, where insurers may need to overhaul their models within 13 months, AI could accelerate implementation and improve efficiency compared to simply adding staff. However, its use may also bring new transparency requirements, as seen in Illinois and Washington, where insurers must disclose whether AI was used to create or review rate filing materials."

Currently in Illinois, insurers file rate increases with the Department of Insurance, but the department has no legal ability to impose any limits or changes.

Illinois required prior approval for insurance rate increases until 1970. Then the state set a "file and use" system, allowing insurers to immediately implement rate increases, but provide rebates for increases not subsequently justified to the Department of Insurance. The legislature let that lapse the following year, according to Paige Waters, partner at the Troutman Pepper Locke law firm.

"Since 1971, Illinois has had open compensation rate regulation, meaning there was no rate regulation for over 50 years, so that's why this is such a big deal that this went through," she said.

The legislation passed the state legislature after prior versions failed last year. These were proposed in reaction to a 27% rate increase by State Farm. Last July, Gov. Pritzker called for legislative action. State Farm's filing for the increase lacked documentation of the catastrophe losses the insurer claimed as justification for the increase.

On October 30, the state's legislature voted against HB 3799, a bill that would have given the state's insurance commissioner the authority to deny insurers' rate increase requests.

In late December, Allstate filed a rate increase that took effect earlier this year, after reporting increased revenue in November.

The insurers will have about a year to adjust to the new rules, said Swanson. 

"Carriers could walk out on the state of Illinois if they don't want to deal with the friction and the new work that this is going to cause," she said. "It would be a lot of work for State Farm to just up and leave its home state. They'll just have to regroup, re-evaluate and come up with different models, because ultimately they are a business, and they're big business. They would lose a lot of policy holders if they left. I understand why they pushed so hard against it, but it seems unreasonable for them to just up and leave when they have a lot of investment there in the state already."

The new bills also set a threshold for notifications to policyholders about any rate increases of 10% or more, at least 30 days before a policy renewal for auto insurance, and 60 days before a policy renewal for property insurance.