Mass. High Risk Auto System Changes Advance

The last few weeks have seen progress on two fronts in the campaign to change the way Massachusetts handles high risk drivers.

One one hand, a new plan that limits the number of carriers servicing the commercial auto high risk market gained approval.

On the private passenger auto side, industry and public policymakers circulated a draft outline of a timetable and plan for converting the state’s reinsurance facility to an assigned risk plan.

In the commercial auto operation, the plan is to reduce the number of servicing carriers involved in handling high risk policies and equalize access to the residual market for all agents.

The governing committee of the residual market organization, Commonwealth Auto Reinsurers (CAR), voted that the new limited servicing carrier program will be in effect for ceded commercial policies effective Jan. 1, 2006.

CAR’s commercial automobile committee will develop the modifications to the rules of operation necessary for the program’s implementation for approval at the governing committee’s June 16, 2004, meeting.

Voluntary agents have been complaining for several years that the present system gives unfair access to certain markets to agents, known as exclusive representative producers (ERPs), who do not have voluntary contracts and write only through CAR. In some cases, voluntary agents have said they have had no choice but to send accounts to nearby ERPs to secure coverage.

Under CAR’s present commercial lines operation, insurers are financially penalized in some cases for reinsuring commercial auto business through CAR, except for certain so-called excluded classes of buses, trucks and other high risk vehicles.

The plan is to reduce the number of insurers handling high risk commercial lines accounts to a handful of companies, while also providing equal access to these carriers for voluntary and ERP agents. While only a few carriers will service the commercial residual market business, CAR deficits will be distributed to all carriers based upon retained voluntary market shares.

The proposal, which was drafted by Michael DeConti of Travelers Property Casualty, calls for three to five CAR-selected companies to be appointed as limited servicing carriers (LSCs) to prevent overflow in the residual market. Each LSC will process approximately $50 million to $60 million of ceded business, which backers say should provide increased efficiencies and reduce the costs of servicing the facility business.

If an agent cannot write a certain client with his or her existing carriers, a carrier would always be available to take that client, and there would be no limitations on how many of the agent’s clients could go to the facility, under the plan.

The plan calls for all agents to be assigned to one of the LSCs for the processing of ceded policies. LSCs will service all classes of ceded business, and will provide only the minimum required coverages for ceded risks.

Another important tenet of the plan is that prior to being ceded, some proof of attempted access of the voluntary market must be presented. Three declinations certified by the agent may suffice.

It also calls for the distribution of ceded business through all agents to the LSCs to be as equitable as possible and allows that this process may be staggered over several years.

Private passenger timetable
Reform efforts in the private passenger market also advanced with the emergence of a draft outline agreed upon by two major players in the effort, the Massachusetts Division of Insurance and the Attorney General’s Office.

The DOI-AG proposal provides a suggested timetable for transforming CAR into an assigned risk plan (ARP) similar to that in many other states.

The draft outline says its “primary objectives” are to reduce the number of ERPs (exclusive representative producers) until 2008 when ERPs will be eliminated altogether; afford agents and insurers a reasonable amount of time to adjust to a new assigned risk structure; and provide an orderly transition from a facility structure to an ARP.

The preliminary draft suggests that the transition to an ARP might be accomplished by 2008, with implementation occurring in stages. Under the proposed timetable, the last piece of facility business would roll off the CAR books on Dec. 31, 2008.

This draft of a plan to move to an ARP leaves several issues unaddressed, including how the state’s system of credits might operate in the face of territorial rate subsidies.

DOI, the AG and various industry representatives have been working on changing CAR for months. Gov. Mitt Romney has also vowed support for the effort.

According to the proposed timetable, a new assigned risk plan structure would be implemented between Jan. 1, 2005, and Jan. 1, 2006. In 2004, a system for transitioning ERPs to become non-ERPs or assigned risk plan representatives would be drawn up for implementation in 2005. In 2006, the ARP would be used for all new business from non-ERPs; in 2007 the ARP would be expanded to accept all previously ceded business from non-ERPs. The transition to an ERP would be completed by the end of 2008.

Frank O’Brien, vice president and New England regional manager for the Property Casualty Insurers Association of America (PCI), said insurers are reviewing the draft.

“We are pleased to see the governor and attorney general collaborating on a general outline for reform of a badly broken system. We are encouraged by the recent progress and hope this ultimately brings about auto insurance reform in the state,” he said.

“We are glad to see that the plan recognizes the priority for reform of the state’s high-risk pool, but that is only one of many changes that are needed to attract more insurers to Massachusetts. Ultimately, a competitive marketplace, free of the current state-mandated single rate for all auto policies, is the key to providing customers with a better choice of companies and the opportunity for good customers to see better rates.”

In other news out of CAR’s, it was learned that a market need analysis identified the city of Lowell as the only community eligible for newly emerging ERP appointments for the quarter beginning April 1, 2004. Based on the results, Lowell has the capacity for two additional ERP appointments, according to the analysis.

CAR also announced it would present two cost containment seminars featuring leaders from the legal, medical and law enforcement communities who will speak on the following topical issues: City of Lawrence Fraud Initiatives; Medical Fraud; Defending PIP Class Action Suits; and SIU Denials. The seminars will be held on May 12 at Lantana in Randolph and May 18, at the Wyndham Hotel in Westborough.