Mass. Proposal Would Phase-In Competitive Rating Over 5 Years; Retain Some Subsidies

June 5, 2006

Massachusetts would phase-in competitive rating of private passenger auto insurance over a five year period utilizing “flex band” rating while retaining certain subsidies and restricting how high liability rates can rise in any one year under a new proposal introduced by a key committee on Beacon Hill.

The bill would retain but modify subsidies for urban drivers, reintroduce the use of gender in rating for inexperienced drivers, and continue a 25 percent discount for drivers over age 65.

It would also ban the use of credit in pricing policies and change the system for insuring high risk drivers.

Representative Ronald Mariano (D-Quincy), chairman of the Joint Committee on Financial Services, unveiled the legislation at an afternoon press conference.

“After 18 months of research into the issue, one thing is clear to me: the current automobile insurance market is in dire need of reform. Insurance companies have fled the state, leaving consumers with little choice. More importantly, our convoluted auto insurance system, the only system in the country in which the state sets the rates, is contributing to a growing problem in our personal lines market,” Mariano said.

The state’s unique system now requires the Commissioner of Insurance to set one uniform rate for all insurers for the upcoming year. The bill would repeal the law providing for state-set rates. In place of that system, the bill calls for a transition over a 5-year period to a system of regulated competition.

During the transition, insurers would have expanding authority to raise or lower rates within prescribed “flex bands,” increasing from plus or minus 5 percent in the first year to plus or minus 10 percent in the last year of the transition. At the end of the transition period, insurers would file their own rates at whatever level they could justify to the commissioner as not being excessive, inadequate or unfairly discriminatory.

The bill would give insurers more latitude in developing their own rating variables than the current competitive rating law allows. That law prohibits the use of age, sex and marital status as rating variables. While credit scoring would be prohibited in determining premiums, the use of gender would be specifically allowed for drivers in their first six years of experience. Insurers would have to be able to demonstrate to the commissioner that any rating factors they used in their rating plans are not unfairly discriminatory.

The bill also repeals the statutes providing for a state-prescribed safe driver insurance plan, leaving insurers to develop their own versions.

According to Mariano, the bill would provide a number of benefits to consumers, both immediate and long-term, and provide them with a number of new protections, including:

A mandatory 5 percent rate reduction in 2007 for good drivers

A freeze on bodily injury and personal injury protection rates in 2007 and 2008 for all drivers

A permanent 15 percent cap or limit on the amount by which any individual driver’s premiums for liability coverages can be increased in any year

Urban subsidies
The bill would also for the first time establish in law subsidies for urban drivers. The amount of these territorial subsidies is now determined by the commisisoner. But this bill would remove the commissioner’s discretion by requiring that each insurer’s rate filing contain weight factors so that each territory’s experience is blended with the statewide experience. The formula proposed in the bill is similar to the one that is currently used in Connecticut, in which statewide experience counts 25% for each territory and each territory’s own experience counts 75%.

Mariano maintained that the bill would also attack excess costs in the system.

“Every dollar that is paid out to fraudulent claims drives up the rates for the rest of the consumers in the state and it has to stop,” said Mariano.

The bill establishes two new funds financed by insurers to support the auto insurance fraud-fighting efforts of local officials. Auto insurers would be assessed $1,050,000 annually to provide funding to the police departments in the seven municipalities where fraud is at the greatest level according to Insurance Fraud Bureau data. Insurers would pay $900,000 annually to fund the fraud fighting efforts of the District Attorneys in the six counties where fraud is at the greatest level. In the case of each fund, the monies would have to be used exclusively for fraud fighting. Insurers would not be allowed to pass along the costs of the programs to insureds or use the costs rate filings.

In addition, the bill would require insurers to contribute $1,000,000 for the development by the Division of Insurance of an interactive web site providing consumers with information to assist with the purchasing and availability of auto insurance. The committee indicated this web site should provide comparative rate information by community as is done in New York.

The legislation also seeks to change the residual pool that is responsible for insuring high-risk drivers. There is a provision clarifying the authority of the commissioner to adopt an assigned risk plan to replace the current loss-sharing high risk pool structure. Commissioner Julianne Bowler has ordered implementation of an assigned risk plan but her authority to do that has been challenged in court. The case was recently heard before the state’s Supreme Judicial Court. This bill would clarify her authority to proceed.

In the assigned risk section, the bill would prohibit drivers with clean records (except for glass claims) for the preceding five years from being placed in the assigned risk plan during the first year of the transition to competitive rating.

“When we have asked companies why they have pulled out of the state, the most common problem cited was our high-risk pool. By moving to an assigned risk pool, we can reduce fraud and attract companies back to Massachusetts,” said Mariano.

Mariano stressed that one goal of the move to a competitive system is to attract more auto insurers to give consumer more choice. Since 1990, the number of companies actively writing private passenger insurance in Massachusetts has fallen from 55, to just 18 companies today.

“There is no competition between companies for business today. By bringing in more companies, and by bringing competition back to the Massachusetts automobile insurance market, we will help consumers get the lowest rates. One company gives you a rate you think is too high? You can head down the street to another company, who may offer a different rate. A vibrant insurance marketplace will help all consumers,” said Mariano.

Mariano’s proposal contains a number of features contained in last year’s bill submitted by Gov. Mitt Romney.

Observers expect the bill could be voted on in the House by the end of July and could pass there. However, approval by the Senate is considered less likely.

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