Mass. Consumer Advocate D’Amato Questions Benefits of Competition

The first thing the insurance industry should know about Steve D’Amato is that although he graduated from law school, he is not a trial lawyer. He also does not sport fangs nor does he carry a pitchfork. Finally, he does not hate insurance companies or agents.

D’Amato, the former director of the State Rating Bureau in the Massachusetts Division of Insurance, has emerged the past few years as an unofficial consumer advocate on insurance issues in Massachusetts. Now, this designation is official as he assumes duties as the new executive director of the Center for Insurance Research, the Cambridge, Mass.-based nonprofit advocacy group founded by Jason Adkins in 1991 and perhaps best known for fighting insurer demutualization plans including John Hancock’s.

The industry should expect to hear a lot more from D’Amato and CIR on a variety of issues. “No one issue is off limits,” says D’Amato, who includes some of the following ideas on his list:

• Discrimination in the pricing of insurance, including what D’Amato terms “passive” discrimination of ignoring actuarial refinements that would lower insurance rates for minorities and low-income consumers;

• “Unfair” exclusions in insurance policies that shift potentially catastrophic costs to a few individuals instead of spreading those costs over a large population of consumers;

• Insurance company “misconduct that deprives policyholders of their rights during mergers, acquisitions, and other corporate deal making;”

• Failures in regulatory oversight of insurers both statewide and nationally; and

• Federal proposals to deregulate insurance rates.

D’Amato’s criticisms are actually more directed at state regulators than they are at the industry per se. His main criticism is that state insurance departments are not as effective as they could be because they are underfunded. He sees his job as “stepping in where regulators fear to tread.”

One of those areas where he can be expected to step in is underwriting. He disagrees with those who contend that underwriting decisions should be left up to the industry alone. “The public should have input,” he believes.

The industry is naturally motivated by profit, and many of its decisions, while they make sense actuarially and economically, end up not being fair to poorer or minority policyholders, in his opinion. “That’s why we have regulation,” he says.

Credit scoring is an example where what might make sense from a profit perspective may not be best when judged by its fairness or its acceptance as public policy, D’Amato contends. “There might be a correlation but this doesn’t mean there’s causation,” he notes. “It’s right to ask if this is a proxy for race or income.”

He points to the recent move by Insurance Services Office to change liability rates to reflect the higher costs of insuring drivers of sports utility vehicles. “If ISO had been consistent, the SUV liability rates would have been changed a long time ago. They’ve known this for a long time,” D’Amato maintains. But, he maintains, the industry has been slow to alter those rates because doing so risks alienating some of its best customers.

On credit scoring and other issues, he hopes to forge a nationwide network of consumers, policymakers, actuaries, economists, attorneys, and even insurance agents to serve those he feels government has failed to protect. “There’s a huge void that we can fill,” D’Amato said.

Regarding the Massachusetts auto insurance system, he is watching closely as reforms are proposed. He has no major problem with eliminating the “incentives and games” within the state’s residual market, Commonwealth Auto Reinsurers, but he thinks that many other proposals to spur competition are off-base.

He thinks any move to an assigned risk plan is “short-sighted” for the industry. With CAR, it does not matter why an insurer places a risk in the residual market and it doesn’t really matter to consumers because they get identical benefits and pricing. However, he argues that an assigned risk plan within even a modestly competitive rating system would require a separate ARP rate, raising issues about which drivers must be charged an ARP rate that might be higher than what the company would have charged voluntarily.

While the CIR director says he’s not anti-competition, he also does not believe that the efficiencies and cost savings under competition are very significant for consumers. “There are some mild benefits of controlled competition and I could support that,” he acknowledges. But most of the competition in auto insurance comes in risk selection, not in pricing, he maintains.

He sees some benefits to minimum and maximum rate bands if applied across the board to all coverages, rather than varying by coverage. Similarly, while some product differentiation can be good, some of it misleading, in his view. He feels it’s best if all insurers are required to offer the same product variations. The idea behind this uniformity in price and product differentiations is to make it possible for consumers to compare.

His critique of competitive rating goes deeper. In addition to not believing competitive rating will help consumers all that much, he also doubts that changing the rating system in Massachusetts will attract new capital and new insurers as many proponents hope.

“Competition does not depend on the rating system,” as much as it depends on the perceived adequacy of the rates, he maintains. He points to the period in the late 1990s when insurers in Massachusetts competed by offering discounts to good drivers rated at Step 9, even though the state still set rates.

“To attract companies you need to do more than change the rating system. Companies also want stability. To do that in Massachusetts, you’d almost have to create a word without history,” he said.

Also, insurers would likely want other changes in addition to more pricing freedom, including easier entry into and exit from the marketplace and serious reductions if not elimination of various rate subsidies. These changes are politically charged and unlikely to happen, he predicts.

His main complaint about reform proposals to date is that they concentrate solely on the rating system and ignore the system’s underlying costs. They “fail to focus on the most effective ways to lower rates. For example, in Massachusetts, safety should be the priority because for decades the state has led the nation in accidents per car on the road.”

He wants to get policymakers and the industry focused on accident prevention, better traffic enforcement, and other ways to cut down on claims, including educating people on how costly accident surcharges can be.

“There is a different mindset here about driving than there is in other states. It’s almost like we have given up. We need to change that,” he said.

“We need to create a dynamic where costs are going down,” he says, arguing that when this dynamic is achieved, rates never drop as much as losses. He argues that this is true even in a controlled rating environment like Massachusetts because there is not as much political pressure to make rate reductions bigger, whereas there is always political pressure to reduce the size of any rate increase that might be needed when losses are rising.

“Competition by itself will not reduce premiums much. The key is to reduce losses—then everyone wins,” D’Amato says.

D’Amato joins advocate Brendan Bridgeland, the center’s policy director and staff attorney, at the Cambridge headquarters. CIR can be reached at (617) 441-2900 or by e-mail at cir@TheWorld.com.