Mass. Regulator Looks Ahead After Court Ruling Clears Way for Assigned Risk Plan

August 23, 2006

“We’re one step closer to operating like a normal market.”

That’s how Massachusetts Insurance Commissioner Julianne Bowler greeted the news that the state Supreme Judicial Court had upheld her controversial auto insurance assigned risk plan.

Bowler referred to the fact that 46 states utilize ARPs like the one she approved on December 31, 2004 to handle their high risk auto insureds. Implementation of her ARP has been held up by court challenges since then.

The transition timetable and some details of ARP she approved almost two years ago might have to be revised to reflect current market conditions, according to Bowler. However she does not anticipate making any major changes now that the court has given the go-ahead. The ARP is to be installed in place of the existing Commonwealth Auto Reinsurers reinsurance mechanism for insuring high risk drivers.

Bowler indicated she was not surprised by the court ruling. “Our legal department is really top-notch. I was comfortable that our decision would withstand legal review,” she told Insurance Journal.

Bowler sees the SJC ruling as a victory for those trying to make the state’s auto insurance system more like those in other states and thereby attract more insurers.

“We’ve taken a giant step. We’re no longer mandating a distribution force,” she noted, hopeful that insurance companies will like that the state is doing away with the CAR system that forced them to have relationships with agents even if they did not use agents.

The ARP operates by assigning drivers to the pool, rather than by assigning agents to insurers as is done with CAR.

While there are issues that need to be addressed, overall she feels the ARP that goes into effect will look much like the plan as she approved it in 2004. That approval triggered opposition by agents and court challenges by several domestic insurers and a consumer group which argued, unsuccessfully, that she did not have the statutory authority to make the switch.

The high court made it clear she does in fact have the authority and now she clearly intends to use it.

Since she first approved the ARP, the residual market has been reworked to more equitably apportion the high risk business among insurers. To accomplish this, about 15 percent of agents were reassigned to different carriers. Bowler said that the ARP might need to be “tweaked” to reflect these changes.

There may also be some tweaking of the implementation schedule, which now calls for the old system to be replaced by January 1, 2008.

The most obvious modification to the ARP will be in the so-called “clean in three” rule. In its decision, the SJC settled a side debate over the state’s “take all-comers” law. The court ruled that the law applies only to the involuntary market and not to individual insurers in their voluntary writings. In short, the ruling means that individual insurers are not required to insure all applicants and may decline to offer policies to drivers but that the ARP may not decline.

This interpretation of the “take all-comers” law runs counter to the language in the ARP that states that the ARP can’t insure drivers whose records are incident-free for the past three years. The idea was to protect clean drivers from being placed in the ARP. But, in the only part of the ruling siding with plaintiffs, the court ordered that this provision be fixed so that clean drivers don’t end up without any coverage.

“The SJC was clear on the ‘take all comers’ law. We can’t have that language,” Bowler acknowledged.

Bowler said the plan contains incentives for insurers to voluntarily write good risks but these sweeteners might not be sufficient to keep them from placing all clean drivers in the ARP. “The Attorney General has been less comfortable relying on market incentives,” she maintained.

While she sees the ARP as a “huge first step” toward attracting new insurers to the state’s auto insurance market, Bowler acknowledges that the ARP alone will not produce a dramatically different marketplace for insurers or insureds.

She said she does not expect the population of risks insured in the residual market—now about 4.5 percent of the state’s four million drivers—to go up or down much as a result of the ARP.

Also, she believes additional reform is needed before new insurers are likely to come knocking. That’s because the state still controls the pricing.

In her view, the Legislature should permit separate pricing — a “dirty” rate — for risks in the ARP. “I can’t set a different rate for the ARP; that would require statutory change,” she noted.

Bowler’s ultimate goal — one shared by her boss, Gov. Mitt Romney — is a system with prices set not by the state but by insurers in competition with one another. Legislation to phase-in competitive rating over a five-year period utilizing “flex band” rating has been languishing on Beacon Hill.

While state lawmakers have not warmed to the idea, Bowler thinks the time is right for a move toward competitive rating. During her four years on the job, she has all but eliminated the built-in rate subsidies for bad drivers and young drivers that have been cited by insurers as obstacles to competition. Also, insurers are making money, as evidenced by the industry’s own recommendation that rates be cut for 2007. These conditions bode well for a smooth transition in which steep price swings might be avoided, she argues.

“Competitive pricing is the next step,” she said.

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