Smaller Mass. agencies could be hurt by surprise move to competitive rating for auto

Massachusetts insurance agents aren’t happy about the decision to introduce competitive rating into the state’s price-regulated private passenger auto insurance system. They enjoy the best market share in the country under the current system and don’t want to see that jeopardized. Their commissions are also protected under the current fix-and-establish system.

“This is going to have a big impact on agents,” Frank Mancini, of the Massachusetts Association of Insurance Agents, said.

Mancini is worried that some smaller agencies, perhaps as many as 20 percent of agencies in the Commonwealth, might have to consider merging or even going out of business as a result of the move to a competitive system.

The Democratic administration of Gov. Deval Patrick, led by Insurance Commissioner Nonnie Burnes, has shaken up the establishment with a surprise decision to end the fix-and-establish pricing system and reinstall a file-and-use system giving insurers more control over what they charge. Burnes is introducing what she is calling “managed competition” beginning in April 2008.

The state’s last experiment with competitive rating in 1977 was also under a Democratic governor but lasted only seven months before being abandoned due to political pressures when rates rose, particularly for urban and young drivers. Since then,

various Republican governors have argued for competitive rating but never taken action to implement it.

“We can no longer be held hostage to the failed 1977 experience,” Burnes declared in her landmark ruling. “[N]o time is better than now to utilize the file-and-use system so that consumers, and the industry, can reap the multitude of benefits of a less regulated system.”

Insurers will be able to file rates and rating criteria and use them unless the department disapproves them. Burnes wants to let insurers use factors such as driving record, number and severity of at-fault accidents, and traffic violations.

Burnes vowed she will retain a “strong yet supple regulatory oversight” to ensure that good drivers enjoy the benefits of managed competition, regardless of where they garage their cars.

She also made it clear she will impose some limits. “I will view with extreme skepticism any rate proposal that is based on socio-economic considerations such as education, occupation, home ownership or credit report or score,” she advised.

The rookie insurance chief acknowledged that three domestic insurers representing 47 percent market share opposed competitive rating — Commerce, Arbella and Plymouth Rock. But they were outnumbered by others that expressed interest in growing if allowed more control over their pricing. These included Amica, USAA, OneBeacon, Liberty Mutual, Hanover and Encompass.

Burnes provided few details of how the system will be moved from price controls to “managed competition” but promised a public hearing.

Most observers expect there will be a political firestorm. “There will be difficulties and debate, absolutely,” said Frank O’Brien, of the Property Casualty Insurers Association of America, who noted that he and most were “stunned” by the decision.

James Harrington, executive director of the Massachusetts Insurance Federation, another group supportive of the ruling, said he thinks those who try to derail it will fail.

“[W]hile it may be challenged both in the legislature and the courts, it is extremely doubtful either effort will prevail, as it is so very substantively aimed at balancing both market and consumer interests,” he commented.

Paul Tetrault, National Association of Mutual Insurance Companies, said a lot will rest on the process. “This process will determine the degree to which this initial decision produces competitive benefits for insurers and consumers alike,” Tetrault noted.

MAIA’s Mancini knows agents will be watching closely, particularly as the process deals with their commissions, which are now included in the fix-and-establish rating process. There is one statutory quirk that could comfort agencies. The state has a little-known law that guarantees that agent commissions will continue under state control, based on the previous year’s figures, for four years after any switch to competitive rating, according to Mancini.