Insurance Reform In The News

WHEN Insurance Commissioner Nonnie Burnes released her decision last week to change the way auto insurance is sold in Massachusetts, insurance companies popped the proverbial corks after reading the fine print.

Burnes, recently appointed by Governor Patrick, also released a cover letter with the decision. The letter is so diametrically opposite in tone and content to the decision that it is hard to imagine the same person wrote them.

The cover letter was a public relations device, announced with great fanfare by the press. It states the commissioner's intention to introduce so-called "managed competition" into the auto insurance market.

It certainly sounds good: Consumers will supposedly get "more choice, more transparency, and lower premiums." In addition, the commissioner "will view with extreme skepticism any rate proposal that is based on socioeconomic considerations such as education, occupation, home ownership, or credit report or score."

There's just one small problem. The insurance industry isn't governed by cover letters. It is, however, governed by the commissioner's formal decision. This is where the trouble starts.

Flying below the press radar, the commissioner adopted a controversial "assigned risk plan" that will allow the insurance companies to reject drivers they consider "undesirable." Consumer groups have consistently opposed this industry-sponsored proposal because it permits insurers to rejectdrivers by using the same unfair criteria -- credit scores, income, education, home ownership -- that the cover letter attacked.

Burnes is playing a shell game: Even if she follows through and prohibits insurers from raising premiums for renters and people with low credit scores, the insurers will still be allowed to use such factors for underwriting. That means they'll be able to refuse to sell them insurance altogether.

How many motorists will suffer this fate? Insurance industry estimates and past experience indicate that more than 1 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 -- at least initially. But eventually, each 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 bad luck. Next-door neighbors with identical cars, insurance coverage, and driving records will be forcibly assigned different rates in the new auto insurance lottery. Some free market.

Based on the actual decision, and not the misleading cover letter, the commissioner's plan really benefits only two groups: the insurance companies, and high-income, home-owning suburban drivers with good credit scores, college degrees, and no teenage drivers on their policies. Drivers, in other words, who look a lot like Mitt Romney -- which should come as little surprise, since the plan Burnes just adopted was initially drafted by the Romney administration.

Despite its flaws, our existing auto insurance system produced a 21 percent decrease in rates over the last three years and would have cut rates roughly 10 percent more next year. That's because accident and injury claims, which are the primary cause of high rates, have finally begun to fall, and state regulation had passed savings from such reductions in claims directly to consumers. Under the new system, it's unlikely there will be an overall reduction as large as 10 percent.

Could the current system be improved by adopting a more competitive plan that preserves next year's 10 percent rate decrease, protects drivers' right to choose any insurer, and allows companies to compete for business based only on driving records? Absolutely.

But that's not the plan consumers will be getting.

Deirdre Cummings is consumer program director for MASSPIRG. Stephen D'Amato, of the Center for Insurance Research, was director of the State Rating Bureau of the Massachusetts Division of Insurance from 1992 to 1998.