Mass. Auto Report Urges Limited Price Competition; No Assigned Risk Change for Now

March 27, 2007

A special auto insurance study group appointed by Massachusetts Gov. Deval Patrick has recommended modest changes to introduce limited pricing competition while warning against a proposed overhaul of the state’s high risk pool at this time.

Although the study group found that introducing “some form of competitive rating is essential to attract and retain insurers willing to write this line of business in the Commonwealth,” it stopped short of recommending a fully competition-based pricing scheme.

Instead of moving to a system with prices determined by competing insurance companies, the state should retain its state-set rates while considering allowing insurers some pricing flexibility, the study group concluded in its the report to the governor. This flexibility could come in one of two ways: permit insurers to deviate up and down from state-approved rates within certain limits, so-called flex bands, or retain state-set rates for compulsory coverages only and give insurers more flexibility to price optional coverages themselves.

The panel advised in favor of keeping existing rate subsidies for urban and inexperienced drivers and against allowing the use by insurers of credit scores, occupation or education criteria in rating.

It urged a delay in creation of an assigned risk plan until a 2006 redistribution of agents is completed and assessed, although the study group’s members did not rule out introducing an assigned risk plan down the road.

The group also urged more cost containment efforts and quicker approval of new endorsements and extra coverages.

Gov. Patrick convened the study group on January 26, after instructing the Division of Insurance to halt the implementation of a new assigned risk plan advanced by the Romney Administration to replace the existing agent-assignment high risk system.

He asked the group to “identify opportunities within the existing system to increase competition and reduce costs while maintaining equity.”

Some of the recommendations would require legislative actions, while others could be accomplished though regulatory changes by the Division of Insurance.

Summary of Recommendations
In its report, the study group set forth these key recommendations:

1. The Commissioner of Insurance should examine alternatives to move towards competitive rating using flex-bands, while maintaining affordability for all drivers, minimizing disruption to the market and maintaining consumer protections. This may include, but is not limited to, allowing price flexibility for all coverages or continuing with a “fixed and established” system for compulsory coverages while allowing price flexibility in optional coverages.

2. Existing rate subsidies for urban and inexperienced drivers should be maintained.

3. Rating factors should be limited to the current rating factors: years of driving experience, number and severity of at-fault accidents, traffic violations and territory. Massachusetts should continue not to use other factors such as: credit scores, homeownership, level of education and occupation as rating factors.

4. The commissioner should delay implementing any assigned risk plan until able to meaningfully evaluate the results of the 2006 redistribution of exclusive representative producers (agents) and subsequent revisions to the rules of Commonwealth Automobile Reinsurers. If inequities continue, the commissioner should give serious consideration to an assigned risk plan.

5. The commissioner should implement a streamlined approval process to allow insurers to set rates and seek approval for endorsements providing enhanced coverages or premium reductions to the standard auto policy.

6. The Safe Driver Insurance Plan should be examined for opportunities to more accurately reward safe driving.

7. Cost containment initiatives should be implemented to reduce accidents and the number and cost of claims.

8. Steps should be taken to provide consumers with more information to assist them in purchasing insurance.

Issues of Concern
The study group members included Chair Daniel Crane, director of the Office of Consumer Affairs and Business Regulation; Deirdre Cummings of the consumer group, MassPIRG; Paul Doherty, a Springfield attorney whose firm specializes in business law and tax; Paula Gold, vice president and chief regulatory counsel from Plymouth Rock Assurance Corp.; Patrick Lee, executive vice president of Trinity Financial; Joseph Meador, professor in the College of Business Administration Northeastern University; and Susan Scott, senior vice president and general counsel of The Premier Insurance Co. of Mass.

In their deliberations over the course of seven meetings, the members identified four key issues of concern: the limited number of carriers writing private passenger automobile insurance in Massachusetts; a complicated residual market system that “has been unfair and inequitable to a large number of insurers;” one of the highest levels of claims frequency in the country; and expensive automobile insurance premiums.

There are 19 insurers currently serving the Massachusetts private passenger automobile insurance market. Since 1990, 35 insurers, including a number of national writers, have left the state. As of November 2006, more than 60 percent of the private passenger automobile insurance market was written by companies that write either exclusively or primarily in Massachusetts. Approximately 85 percent of all business is written through agents.

The study group members agreed that introducing “some form of competitive rating is essential to attract and retain insurers willing to write this line of business in the Commonwealth.”

They tried to balance the desire to attract more insurers by introducing some form of pricing competition with a desire to leave intact a number of features of the current system that discourage new entries into the marketplace.

“Massachusetts may never be an ideal market for every company but … due to the state’s strong demographics, the Massachusetts market should be made more attractive to a greater number of insurers, including direct writers. However, all members agreed that attracting and retaining insurers should not be accomplished at the expense of consumers,” the report says.

The study group memebrs concluded that the following initiatives were among those that might prove to be effective in preventing future company withdrawals or insolvencies, and bring additional carriers to the state: a prohibition on gaming the system and advances toward parity and transparency in the residual market; investment in cost-containment measures; greater flexibility in setting rates; and implementation of a streamlined approval process for enhanced coverages and endorsements.

Competitive Rating
In introducing competition into pricing, the group agreed that competition should be introduced “gradually to allow the market to adjust and to measure the impact on drivers who least can afford insurance.”

The report recommends that the insurance commissioner investigate ways of using flex bands, such as introducing them gradually for all coverages, or having the state continue with “fixed and established” rating for compulsory coverages while allowing companies more flexibility in pricing increased limits and optional coverages.

To further inject competition, the report recommends that the insurance department streamline an approval process that would allow insurers to set rates and seek approval for endorsements that provide enhanced coverages or premium reductions to the standard auto policy. “Aside from the obvious benefits to policyholders, this provides companies with an opportunity to distinguish themselves from their peers, and to compete with an otherwise identical product,” the report maintains.

With regard to rating variables, the group insisted that rating factors should be limited to the current set that includes years of driving experience, number and severity of at-fault accidents, traffic violations and territory. “Massachusetts should continue not to use other factors such as: credit scores, homeownership, level of education and occupation as rating factors,” the report makes clear.

The study group final report recommends continuing the state’s existing express subsidies for urban and inexperienced drivers in auto rates for both the voluntary and residual markets. “These types of subsidies were universally viewed as serving important social goals. Furthermore, they exist to a certain degree in most other states,” notes the report.

The group suggested that good drivers under the Safe Driver Insurance Plan might not be receiving sufficient rate relief through discounts offered because the system has built in subsidies for “bad drivers.” Specifically, it was suggested that “the discounts are not as deep as they might be” because drivers with surchargable incidents are not assessed the true cost of their points. “All members agreed that the SDIP system should be re-examined with an eye toward providing further incentives to reward good driving behavior,” the report says.

Assigned Risk Plan
Massachusetts currently has a unique residual market system that relies on assignments of agents and is administered by Commonwealth Auto Reinsurers. The study group recommended that new Insurance Commissioer Nonnie Burnes delay implementing any assigned risk plan until “she is able to meaningfully evaluate the results of the redistribution” of Exclusive Representative producers (ERPs) that occurred in 2006, and other rule changes underway at CAR.

“Members agreed that the current private passenger automobile insurance residual market, administered by CAR, has been a source of great frustration to regulators and unfairness for many insurers. The system’s reliance on agent assignments undermines the statutory requirement of a fair and equitable distribution of residual market share among carriers. CAR’s current mechanism is widely viewed to be unduly complex and susceptible to gaming the system. As a result, it is perceived to provide an unfair advantage to companies who are experienced in the market and willing to invest in ‘playing the game,'” says the report.

Former Insurance Commissioner Julianne Bowler cited similar concerns over the existing residual market system in advancing an assigned risk plan during her tenure despite opposition from Commerce, Arbella and other domestic carriers. But her plan was halted when Patrick was sworn in to replace her boss, Mitt Romney, as governor in January. Patrick urged a rethinking of the assigned risk pan and named the study group.

While advising against implementing an assigned risk plan to replace the current system now, the study group did report that it “generally accepts an assigned risk plan as a fair and equitable mechanism for distributing risk to a residual market” and that the “current system at CAR may not be a long term solution.”

Study group members said they hoped that new rules at CAR together with the redistribution of ERPs “might result in a level playing field, and eliminate the need for an assigned risk plan,” however the did not rule out an eventual turn to an assigned risk plan.

“If inequities continue, the commissioner should give serious consideration to an assigned risk plan. Members suggested that an assigned risk plan would be more likely to be successful if it were implemented as part of a comprehensive reform initiative, or at least after some steps to introduce competitive rating have been tested,” says the report.

The report recommends the implementation of initiatives to reduce accidents, as well as the number and cost of claims. These included beefing-up law enforcement; identifying dangerous intersections and encouraging municipalities to use local aid to make necessary improvements; examining seatbelt laws and whether cell phones add to accident rates; and encouraging enhanced technology for traffic enforcement such as intersection cameras.

Also, the report targets other areas for potential cost savings on a post-claims basis including costs associated with auto body, auto glass and health care claims, which, the report maintains, “are areas where special interest groups have historically impeded progress.” Other ideas include legislative changes to the no-fault insurance and personal injury protection coverage, including establishing a limitation upon reimbursement for a claimant’s health care services to a schedule of fees or the rates established by a claimant’s health insurer.

Consumer Education
Finally, the study group urged better consumer education. Specifically, it suggested that the Web site for the insurance department be enhanced to allow consumers to search discounts by group, rather than by company, and to offer an interactive program to provide price quotes and illustrate coverage options and discounts.

Industry Reaction
The American Insurance Association (AIA) said it was encouraged that the recognizes the need to add competition to this market.

“AIA believes a vibrant, competitive marketplace will best serve the state’s drivers, and we look forward to working with the administration to implement elements that will inject competition into the market,” said John Murphy, vice president, AIA Northeast Region.

But the insurer group is sorry the assigned risk plan is not being implemented at this time.

“AIA is disappointed that the group recommends delaying implementation of an assigned risk plan which would create a fair distribution of the state’s highest risk drivers among insurers. This issue has been studied for years and the attorney general found that the current system does not meet the constitutional mandate for a fair and equitable system.

“Assigned risk plans are the standard in 43 other states. There is no risk in moving to an assigned risk plan,” AIA’s Murphy concluded.

Consumer group executive and study group member Cummings of MassPIRG called the report “good news for consumers.”

While domestic insurers Commerce and Arbella opposed the move to the assigned risk plan, Liberty Mutual, a major insurer based in Massachusetts supported it — and contineud its support even after the study group’s report.

“We are especially pleased that the report acknowledged that the involuntary residual market is ‘unduly complex and susceptible to gaming.’ We urge Insurance Commissioner Burnes to take swift action to eliminate this inequity by implementing the previously approved assigned risk plan,” said Edmund F. Kelly, Liberty Mutual Group chairman, president and chief executive officer, in a statement.

Kelly said Gov. Patrick deserves credit for focusing on ways to improve the state’s auto insurance system for consumers. “We welcome the task force’s report, which includes many aspects that will directly improve competition among the state’s auto insurers,” he said.

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