September
20, 2007
To: Nonnie Burnes,
Commissioner of Insurance
RE: Proposed New Regulation 211 CMR 79.00, Private Passenger
Motor Vehicle Insurance Rates; Docket No. G2007-07
FR: Deirdre
Cummings, Legislative Director
Consumer Improvements
to Proposed Auto Insurance Regulations
We all like competition when it works – but we’ve seen
enough failures to know that without proper safeguards, businesses will seek to
add to their bottom line at the expense of the public and the consumer
(remember the current mortgage crisis, toxic toy recalls, ENRON, and student
loan kickback scams, to name a few examples).
With proper rules, oversight and information our competitive
market can serve the consumer. But, as we have seen all too often, powerful
interests are working to undermine our safeguards.
Despite its flaws, our existing
auto insurance system had some important consumer protections: 1) Rates are primarily
based on our driving record - using just
driving record, experience and territory as the factors in setting rates; 2)
consumers are protected from being unfairly rejected/ turned down by insurance companies
through CAR – or a reinsurance system; 3) rates are kept from being excessive
or unaffordable in urban communities and for new drivers through rate
flattening; 4) and finally, our current
system has produced a whopping 21% decrease in rates over the last three years
and would have cut rates roughly 10% more next year. That’s because accident
and injury claims, which are the primary cause of our high rates, have finally
begun to fall, and state regulation (until now) had passed savings from such
reductions in claims directly on to all consumers.
Any new plan – competitive
or not – must be measured against what consumer have today. Consumers should
have a plan that preserves next year’s 10% rate decrease, protects our right to
choose any insurer, and allows companies to compete for our business based only
on our driving record.
But that is not what these
proposed regulations will do.
I am submitting for the docket 12 consumer provisions that
must be included in our new auto insurance regulations.
I want to highlight the most important areas in the proposed
regulations that must get addressed.
1. Rating and Underwriting Factors
For the first time in over 30 years, insurance companies
will be allowed to use discriminatory factors in selling auto insurance. While
banning some of the most obviously unfair factors, the proposed regulations
permit insurers to use many other factors that could harm low-income and
minority drivers, including factors that act as proxies for the very factors that
are banned. In order to protect against
discrimination and to ensure that driving record is the primary factor insurers
use in setting premiums and in underwriting, it is necessary to list expressly
all the rating and underwriting factors that may be used by insurers.
In addition, insurance scores and information gathered from
consumers’ credit reports have only been temporarily prohibited for rating purposes
and have not been restricted at all for use in denying coverage altogether.
By not limiting the factors that are allowed in setting
rates or in allowing insurers to deny coverage altogether, you dilute the
weight or importance of our driving record.
Consumer groups and leaders have all called on you and Governor
to ban the use of all socioeconomic rating and underwriting factors by
expressly “allowing” the factors that can be used.
See:
Letter from Mayor Menino, Sept. 10, 2007
Letter from 10 Consumer Groups, August 1, 2007
Letter from 3 members of the Governor’s Auto Insurance Task
Force, July 19, 2007
2. Residual Market
Consumer groups have consistently opposed the “assigned risk
plan” as proposed because it permits insurers to reject drivers they consider to be “undesirable” by using unfair criteria
– like insurance scores or any other factors than the 12 factors prohibited.
Insurance industry estimates and
past experience indicate that more than
one million drivers – including hundreds of thousands with perfect driving
records – will be branded “undesirable”
and lose the ability to shop around for the lowest rates in the
market. They’ll miss out on the competition
right from the beginning.
Some of the one-in-four Massachusetts drivers
deemed “undesirable” will be permitted to stay with their current insurer – only
initially. But eventually, each of them
will be randomly assigned to one of 19 insurance companies (with 19 different
rates). And, as a result, these drivers
could not only lose access to combined auto/homeowners discounts, but also be
stuck with a company that offers higher rates, based on pure luck. Next-door neighbors with identical cars,
insurance coverage, and driving records will be assigned different rates in the
new auto insurance system – losing their ability to take advantage of the “competitive
market place.”
For these reasons the Clean in 3 provision in the MAIP must
be strengthened and made permanent. Underwriting factors must be expressly
allowed and limited to primarily driving record. At the very minimum you must
require insurers to file and disclose their underwriting factors.
3. Overall Rates
It is our belief that under this plan consumers will not see
rates as low as what the current rate setting process delivered. As stated
earlier, it is likely we would have seen another significant drop in rates this
year. In testimony submitted to this office on June 15, 2007 regarding the competition
hearing and citing the AIB “Massachusetts Private Passenger Automobile 12 Month
Trend Indications” dated May 2007 : “…it
is nearly certain, based on existing data, that if the Commissioner fixes and
establishes the rates for 2008, the average rate decrease from current 2007 rate
levels will exceed 8.5%.”
Any new plan must and should be measured against a likely
rate decrease of 10% (assume industry number would be low). A full evaluation
of rates must be done, by this office and an independent agency, while we go
through this regulatory transition. In order to fully appreciate any impact the
new regulations would have on rates, findings must be in comparison to what the
rates would have been under the previous system.
Further, by not addressing our high-in-the-nation accident
rate, this office has failed to adopt the most significant reforms to lower
premiums. The new regulations should
mandate a comprehensive plan to reduce our accident rate, which is the single
largest factor driving our premiums. Without such a plan, consumers will fail
to see any meaningful rate reductions in the long term.
4. Consumer Tools
The current regulations fall far short of empowering the
consumer in the new competitive market
place.
Rates and products should be standardized, uniformly
disclosed, comparable and made accessible to the public on the Division of
Insurance’s website. The Health
Connector, is a great example of a tool that allows
consumers to compare various health insurance products. While not exactly the
right model, it shows how we can present a complicated product to consumers in
a meaningful comparable way. This format will allow consumers to make informed
choices and allow regulators to catch new unfair or discriminatory rating and
underwriting factors.
