The industry officials who run the private passenger auto high risk system in Massachusetts have started drawing up rules in response to urgings by the administration of Gov. Mitt Romney to make their operations and the field of competitors more like those in other states.
Members of the governing committee of Commonwealth Auto Reinsurers (CAR) met just days after Massachusetts Insurance Commissioner Julianne Bowler formally called upon them to change the way high risks are handled. Bowler has given CAR 30 days to adopt rules to convert CAR to an assigned risk type plan. If CAR doesn’t, she said she would exercise her own authority to implement the changes. The commissioner directed that the transition be accomplished over three or four years to minimize disruption in the marketplace.
A committee of 16 of the state’s 19 insurers, agents and public officials, including representatives of Bowler’s division and Attorney General Tom Reilly’s office, has been working behind-the-scenes for months on such a plan and has already developed a timetable.
At the same time that CAR was under pressure to reform, a task force named by Romney began looking into other changes including legislation that could result in elimination of some of the rating subsidies and opportunities for fraud that exist in the current system.
“If any insurance system needs reform, it is this one,” said Romney, standing in front of an antique Stanley Steamer at the Museum of Transportation in Brookline’s Lars Andersen Park to announce his task force. He called the Massachusetts auto insurance system a “punitive” system that is riddled with fraud and that rewards bad drivers.
“It’s time to give our consumers more choice and the advantages that come with safe driving,” said Romney. “The goal of the task force is to form a consensus for a fair and smooth transition to a competitive marketplace.”
He also called the system “anemic,” citing the decline in the number of auto insurers from 53 in 1990 to 19 today. He said he wants a system that will lure new capital and national insurance companies to the state.
Romney named Progressive and State Farm as two companies that write elsewhere but not in Massachusetts that have told him they might be attracted to the state if the system is changed.
He quoted one resident insurer as telling him that it was considering leaving the state because “it’s easier to do business in Venezuela than here.”
Romney asked the task force to focus on eliminating rate subsidies now paid by good and experienced drivers to support bad and inexperienced drivers, subsidies which a recent study shows are considerably higher than in other states and which contribute to insurers’ reluctance to write business here.
Romney stopped short, however, of supporting elimination of a 25 percent discount given senior citizens and said he would not support erasing the subsidies that rural and suburban communities pay to cover the costs of some urban territories including Boston.
In addition to Bowler, the members of the task force are Senator and Assistant Majority Leader Marian Walsh, Representative and House Insurance Committee Chairman Ronald Mariano, Chief of the Attorney General’s Public Protection Bureau Alice Moore, Secretary of Economic Development Ranch Kimball, and Consumer Affairs Director Beth Lindstrom.
Romney said he hopes to hear back from the task force by the end of the year.
CAR to ARP Insurance chief Bowler, who has been urging a change in CAR for more than a year, finally made her position official in a letter on April 29.
“A healthy private passenger automobile market depends on rules that distribute high risk losses in a fair and equitable manner. My conclusion is that the only system that will efficiently, fairly and equitably distribute losses is an assigned insurance system that assigns individual policies to carriers based upon market share at the point that they are denied coverage by a carrier,” Bowler wrote . “Such an assigned insurance plan is in place in the vast majority of other states and works to establish an efficient, fair and equitable distribution of high risk losses.”
The plan developed by Bowler, industry officials, and the Attorney General’s Office for transforming CAR into an assigned risk plan (ARP) calls for reducing the number of ERPs (exclusive representative producers have contracts with CAR only) until 2008 when ERPs will be eliminated altogether; affording agents and insurers a reasonable amount of time to adjust to a new assigned risk structure; and providing an orderly transition of risks from a facility structure to an ARP.
Bowler and Romney cited a recent report by Tillinghast Towers Perrin that compares the Massachusetts system of rate setting, subsidies and high risks with systems in other states.
Under CAR’s present rules, high risks are assigned to carriers in blocks by ERP agency, rather than assigned individually as in assigned risk plans. The Massachusetts method ends up penalizing some carriers over others since some carriers get blocks of business with high loss ratios while other get blocks with low loss ratios, the Tillinghast report claims.
The report found that a group of nearly 100 ERPs assigned by CAR has loss ratios in excess of 150 percent and some of these agencies’ loss ratios approache300 percent.
“This unfair distribution of losses has created an inequitable distribution of residual market risk that has been a significant factor to existing carriers exiting and new carriers declining to enter the market,” Bowler wrote CAR officials.
Tillinghast Analysis The much-anticipated Tillinghast analysis of the Massachusetts system found that 14 percent of the state’s drivers pay less than loss costs indicate they should, while 86 percent pay more to subsidize the others. The degree of subsidization varies by class and territory but in general, rural and suburban rates subsidize urban rates, experienced drivers subsidize inexperienced drivers, and inexperienced female drivers subsidize inexperienced male drivers, the study says.
The most dramatic example is of non-urban, experienced drivers paying a bit more (less than $100 per policy) while the 4.1 percent of the market that is urban, inexperienced drivers pay as much as $500 below their costs.
The most heavily subsidized class in Massachusetts is inexperienced drivers who have been driving less than three years, most of whom are young, according to the report. The most heavily subsidized territories include the urban areas of Boston, Lawrence, Chelsea, Brockton, Everett, Lynn, Revere and Springfield.
The report, a year in the making, was prepared by Thomas L. Ghezzi and Katharine Barnes, consulting actuaries, in the Boston office of Tillinghast Towers Perrin at the request of the Massachusetts Division of Insurance. The authors examined rate differentials in California, Connecticut, Illinois, Maryland, New York and Pennsylvania for comparison and found that rate differentials by territory and class are much steeper in these states than in Massachusetts where rates are flattened. The report presents an analysis but does not contain recommendations for changes.
The study attempts to answer why the number of carriers writing private passenger auto coverage in the state has plummeted from 53 in 1990 down to 19 today, even as the number of insured cars has increased by 20 percent. While the state-set rates, various rate subsidies and the CAR operation tend to discourage insurers from writing in the state, the authors suggest that several statutes and regulations are also to blame:
• The state’s “take-all-comers” law, which requires insurers to offer policies to virtually all licensed drivers • Financial penalties for over-utilizing the involuntary market • Financial credits for voluntarily writing under-priced business, and • The special protections for a class of agents (ERPs)
“These incentive mechanisms, on top of subsidized rates, result in a market that is more complex than any other state in the nation. This complexity, combined with state-set rates and subsidies, creates disincentives for carriers to enter the market, due to the severe restrictions in the carriers’ ability to control their own financial results,” the report concludes.
The credits and penalties have contributed to the reduction of the CAR market share from 55 percent in 1990 to 7.4 percent currently. However, the report finds, CAR’s method of distributing accounts has contributed to the market’s unfairness in the view of insurers.
The study suggests that fraud may be behind the finding that a small group of ERPs is responsible for a disproportionate share of losses. Out of 2,360 agencies in the state, 800 are ERPs. Most agencies including ERPs fall near a 70 percent loss ratio. However, 63 ERP agencies in under-priced territories and another 23 in over-priced territories have unusually high loss ratios in excess of 150 percent., experience which cannot be explained by the rate subsidies alone, says the report.