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To:
Office of Attorney General Martha Coakley
Insurance and Financial Services Division
One Ashburton Place
Boston, MA 02108

From:
Deirdre Cummings, Legislative Director, MASSPIRG
44 Winter St, 4th floor
Boston MA 02108

RE: Comments in support of Proposed Regulations, 940 CMR 28.00: The Regulation of the Sale of Private Passenger Automobile Insurance

June 23, 2010

MASSPIRG is a statewide, nonprofit, nonpartisan, members-supported consumer advocacy organization. MASSPIRG has long been involved in auto insurance matters, advocating for lower auto insurance rates, for fair pricing and underwriting practices by the industry, and for strong insurer oversight.

We are here today in full support of the Attorney General’s proposed regulations, 940 CMR 28.00, which provide long overdue and much needed consumer protections to Massachusetts drivers in the new deregulated auto insurance system. In short, the proposed regulations require the insurers to focus more on how we drive – instead of on who we are – in determining our premiums. The regulations will lift the new veil of secrecy that prevents consumers from identifying unfair pricing and underwriting practices by insurers. And lastly, the regulations will promote competition by reining in deceptive marketing claims and by making it easier for consumers to compare prices and products and to switch companies.   

While the new deregulated auto insurance market has been a boon to the insurers, consumers have paid a high price. Average premiums are higher than they would have been under the “fixed and established” process where the Division of Insurance, after a review of the industry’s filing, would establish a rate ceiling. This process ensured that consumers would not be overcharged, yet had still allowed the insurers to compete by offering lower prices. The 2008 average premium under the new “managed competition” system had declined by 7% instead of the more likely decrease of at least 11% under the fixed and established rate. That 4% shortfall amounts to a transfer of about $150 million from consumers to insurers.

The recent experience with the near collapse in our financial markets, the scandals in the student loan market and the tragedy happening today in the Gulf Coast have shown us that we need more not less consumer protection, oversight and transparency. These regulations do just that.

Given that automobile insurance is a legally mandated requirement for all drivers, without which consumers place their financial security and livelihood at risk, we must ensure the rates and insurance company practices are reasonable and fair. While rates have recently been on the decline, the trend is reversing and premiums are starting to climb. We should not delay in adopting these critical reforms.

Highlights of the consumer protection regulations:

1.    Prohibits insurers from using unfair or already prohibited rating and underwriting factors.

The current auto regulations list a number of factors that insurers may not use in setting rates and underwriting. Specifically, the regulations prohibit the use of: sex, race, marital status, creed, national origin, religion, age, occupation, income, education, homeownership, and credit information.

Up until 2008, Massachusetts used a very limited set of rating factors in setting rates. An individual’s driving record – which we believe is both the fairest and the most accurate single indicator of a particular driver’s risk of getting into an accident – received more weight here than in any other state.

By approving myriad new factors – most of which target “who you are” instead of “how you drive” – the deregulated system dilutes the weight given to driving record. Moreover, it is of particular concern that many of the newly approved factors are obvious proxies for the very socio-economic factors that are supposedly prohibited by the “managed competition” regulation (and, in some cases, also by statute).

A discount based on whether or not you have a homeowners’ insurance policy is in fact a proxy for the use of the prohibited rating factor of homeownership, and is also a proxy for income and for credit information. In addition, the good student discounts or those given to college alumni associations appear to be proxies for the prohibited rating factor of education, as well as for income. Other discounts or rating factors that appear to be proxies for prohibited factors include Multi Car discounts, Years Licensed discounts, Hybrid Vehicle discounts, Loyalty discounts, and those given to professional organizations.

Insurance companies are continuously looking for new rating and underwriting factors. They allege that these factors correlate with losses. Most of these factors correlate with race and income, and consequently, the use of these factors by insurers harms minority and low-income drivers.

Moreover, there is no showing by the industry as to why these factors might correlate with losses. Is it because these factors are proxies for race and income? Is it because a correlation exists for some subset of drivers, but not for all drivers? Without a good understanding of why a rating factor produces a correlation, it is unfair from the consumer’s perspective to allow insurers to use such a factor to charge higher rates.

While some of these types of discounts had been allowed in the fix-and-established rating system, consumers were protected because the insurers generally were not allowed to pay for the discounts by charging higher rates to drivers not receiving the discounts. Under the new deregulated rating system, drivers not eligible for these discounts pay more and are essentially the funding source for the discounts.

We support the proposed regulations, which prohibit the use of proxies for prohibited factors in rating and underwriting. We also think it would be important to prohibit insurers from soliciting the socio-economic information. A number of insurers use websites that require, or appear to require, consumers to include information about their credit score, employment or other factors that are not allowed in rate setting. In 2008 I sought quotes from 16 insurers and was asked to provide the following information: Was I married? What was the highest level of education I had? What type of job do I have or more specifically whom do I work for? What kind of home do I have? If insurers are not allowed to use the information for rating or underwriting, they ought not to be allowed to collect it or ask customers for it.

2.    Promotes Transparency

The loss of the regulated fix-and-established rate setting process has made it more important to require basic transparency. In order to protect consumers from unfair practices, rating factors must be disclosed and rates must be able to be replicated.

3.    Prevents Misleading Marketing Practices

The proposed regulations adopt a set of basic marketing rules, and adopt common sense requirements that better inform the public as to their choices in the marketplace. Claims of savings and prices must be able to be substantiated, quotes must be timely, accurate, and complete, and insurers are prevented from using the banned socioeconomic factors in marketing. Also, insurers are barred from steering consumers into the higher priced six month insurance policy.

4.    Making  the competitive market work better for consumers

Providing consumers with the tools necessary to compare insurance prices and products and eliminating barriers to switching policies will put more pressure on insurers to lower prices and or improve their products.

Currently, consumers must spend hours calling agents or insurance companies and be available over the course of a few days to receive and place follow-up calls to get price quotes. For example, in 2008 I called for quotes from 16 insurers, spending 6-8 hours over the course of 3 days. This was time consuming and difficult. In addition, some insurers charge a fee for cancelling their policies to switch to another company. If we made this process easier for consumers, the market benefits would be shared amongst both consumers and insurers, as insurers would be more responsive to consumer demands and pressure. The Division of Insurance does have a website listing insurers and “sample premiums,” which I found to be grossly inadequate with sample premiums significantly different from the actual quotes. Further, there was no correlation of low-to-high-cost ranking from the website to actual quote.
 
Without meaningful, accurate, and comparable price information, consumers’ ability to make informed choices is compromised and the insurers hand is strengthened as we are forced to rely on biased marketing gimmicks, pitches and ads.

These regulations should include access to an online system for consumers to easily solicit and compare quotes. We ought to be able to go online, fill out a uniform application and then have each insurer send us a price quote. Coupled with the important reforms in these regulations, including improved disclosure of all fees especially cancellation fees; restrictions on misleading marketing practices; transparency in rating and underwriting factors, and market oversight; a consumer web site would level the playing field and provide for a fairer and more competitive marketplace.

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