Late yesterday, the Commissioner of Insurance
Nonnie Burnes, released two auto insurance decisions. The first announced her
plan to move to so-called “managed competition” for auto insurance rates, and
the second replaced our current rules for how we allow insurers to deal with
the residual market, or drivers insurers do not want to insure.
We support competition, as long as it is based
on our driving records. However, without having any detail or the accompanying
regulations of “managed competition,” it
is impossible to examine how the new plan may benefit or harm consumers. The
Commissioner plans to issue regulations and hold hearings on the matter.
Massachusetts drivers have seen
record auto rate declines – over 21% in the last three years, and a continued
decline was anticipated again for next year. We want to ensure that under
any competitive rating plan the Commissioner preserves the consumer protections
that exist in our market today but exist in few other states. We also want to
ensure that our premiums continue to decline.
“With
$4 billion in premiums at stake, we, like all consumers, want insurers to be
able to compete, but to do so without using unfair rating or underwriting
practices or gouging the public,” said Deirdre Cummings, Legislative Director,
MASSPIRG.
“There
is a right way and a wrong way to get competitive rates,” said Stephen D’Amato
from the Center for Insurance Research. “We look forward to participating in
the process.”
The second matter in which the Commissioner has
rendered a decision is on the adoption of an assigned risk plan (the “MAIP” or
Massachusetts Auto Insurance Plan) to replace the current reinsurance plan that
protects consumers against discrimination by insurers. MASSPIRG and the Center for Insurance
Research opposed the adoption of the MAIP, as it may result in higher rates and
subject consumers to discriminatory underwriting practices.
In
fact, the Governor’s Automobile Study Group also opposed the adoption of the
assigned risk plan, and instead recommended that an assigned risk plan not be
adopted until further review and evaluation of recent changes in Commonwealth
Automobile Reinsurers (“CAR”) rules aimed at improving the system.
Specifically, the Study Group recommended, “ the Commissioner should delay
implementing any assigned risk plan until able to meaningfully evaluate the
results of the 2006 redistribution of exclusive (producers) agents and
subsequent revisions to the Commonwealth Automobile Reinsurers rules.”
As stated in earlier testimony before the
Division of Insurance, we believe the proper path to CAR reform is to monitor the effect of
last year’s order by the Division of Insurance to redistribute Exclusive
Representative Producers (“ERPs”) and, if necessary to ensure fairness, to
modify the formula for dividing the residual market deficit among the insurers
while preserving the reinsurance structure of CAR.
As
way of context – Massachusetts
auto insurance consumers are not calling for changes in the residual market.
This is and has been an issue among insurers – some insurers charging others of
gaming or manipulating the system. By way of correcting or solving that,
consumers should not have to pay the price. The new MAIP attempts to solve an
industry problem at the expense of the consumer.
Based on industry estimates, eventually more
than a million drivers are expected to be rejected annually under the proposed
plan. Rejected drivers will be randomly assigned to another insurer. As a result, they will lose the freedom to choose their
insurer, will be subject to discriminatory underwriting practices, and will
often face higher insurance costs.
Specifically, the new regulations will:
o
Allow insurers to reject drivers based on
non-driving related factors. The new plan appears to allow insurance companies
to use most information, including personal information – such as a driver’s
credit score, income, education, and home ownership status (i.e., whether the
driver doesn’t own a home) – to reject drivers. (Current statutes do prohibit
some factors such as occupation, sex, marital status, and territory.) While
some drivers with a clean driving record for 3 years (“Clean in 3”) will be
prohibited from being non-renewed – that protection vanishes in 2010. Further,
the “Clean in 3” protection is only granted to those drivers who stay with
their current insurer. After 2010, twenty-five percent (one million) or more of
all Massachusetts
drivers are expected to be rejected and placed in the MAIP.
o
Result in higher insurance premiums for
many rejected drivers. Initially, hundreds of thousands of drivers forced into
the MAIP will lose access to the lowest rates in the market. They could also pay higher premiums as a
result of losing access to discounts (such as good driver discounts and
combined auto/homeowners insurance discounts) when assigned to an insurer not
offering the discounts. Eventually, an estimated million or more drivers will
likely lose access to the lowest rates in the market and to discounts.
o
Create a lottery in which initially
hundreds of thousands – and eventually a million or more – drivers forced into
the MAIP will randomly receive one of 20 or more rates. Depending on pure luck,
drivers with identical rating characteristics will pay more or less.
o
Eliminate choice. All drivers will no
longer have the right to choose their insurer, with the exception that “Clean
in 3” drivers will have the right to stay with their current insurer until
2010.
o
Fail to address the #1 Consumer Complaint
– high premiums. While the new plan clearly addresses the complaints of some
auto insurance companies, it would do nothing to address drivers’ complaints of
high premiums. The assigned risk plan does nothing to correct the main cause of
our high premiums – our highest-in-the-nation accident rate. The only road to lower premiums is through cost reduction.
If we pursued a comprehensive cost‑containment effort that improved our worst‑in‑the‑nation
accident rate to just second worst and attacked fraud as we did in the city of Lawrence, we could cut
auto insurance premiums by approximately 20%, or about $200 on average per car
per year. Without dealing with the underlying costs, we will not see any
overall decline in premiums, but rather a shifting of premium dollars – some people
would pay more and others pay less, based on non‑driving related factors that
make no sense to the average driver.
