Mass. Seeks to Shake Image as Regulatory Outcast

Massachusetts officials, moving deliberately to change the image of the state as a regulatory nightmare for insurance companies and to re-make its systems to look more like those found elsewhere, are making progress even as they hit some bumps along the road.

Rules on large commercial risks have been eased, the system for insuring high risk commercial vehicles has been streamlined and serious efforts are underway to change the state’s private passenger auto system.

The pace of reform is being slowed by the state’s long history of close regulation, officials’ reluctance to create controversy, and a lack of awareness over what benefits changes could bring.

According to the head of the Massachusetts research bureau of the Division of Insurance (DOI), Bay State consumers and lawmakers are often unaware of the insurance advantages enjoyed in other states or the problems within their own system.

“Massachusetts people don’t understand what other options could be available to them,” said Kevin Beagan, director, State Rating Bureau, in remarks before the Boston CPCU Society recently.

The SRB serves as the division’s own rating and research arm.

Beagan cited the lack of awareness about how the Massachusetts system really works as one of the reasons changing insurance laws and regulations takes so much time. “You have to build consensus,” he said.

Beagan thinks the public needs to be educated about how insurance markets are “inter-related.” If insurers stay out of one market in a state, such as private passenger auto, they often stay out of others, such as homeowners, and further restrict consumers’ options.

He noted that Massachusetts is down to just 19 carriers writing private passenger auto, with the dominant carriers being local companies. This shortage of capacity is now affecting the state’s homeowners market, especially on the Cape and Islands, leaving the state without a large base of national insurers among which to spread the risk and leaving local companies exposed to potential losses from major storms.

The lack of national carriers also affects the state’s ability to devise other solutions to homeowners insurance as well. “It limits the options,” he said.

Commissioner Julianne Bowler has embarked upon a series of changes to the state’s private passenger auto market starting with the reinsurance facility and the safe driver plan. Beagan said these steps “may appear small but at least they are being taken,” adding that repairing the state’s property/casualty markets will take a step-by-step approach in the state.

He said the goals of changes are to increase the number of insurers writing business and allow for “vibrant” product development.

“The markets work best when more companies compete,” he said.

Beagan hopes the steps being taken also send the message that the “door is open” to change in the way Massachusetts approaches all property/casualty insurance, including workers’ comp and other commercial lines, not just auto lines.

“We can’t change it overnight. Change is slow; it takes time,” Beagan said. “It takes time and education and bringing people and ideas into the process.”

In keeping with Beagan’s message, House and Senate lawmakers agreed on a measure to deregulate insurance rates and forms for certain large commercial risks. The bill has been stalled in committee for several years. Gov. Mitt Romney is expected to sign the bill into law.

The measure permits commercial accounts with more than $30,000 in premium that also meet several other criteria to choose to be exempt from the state’s prior approval of rates.

“This bill (H.B. 1700) represents the first time in many years that the Legislature has acted to remove a layer of regulation from the insurance industry,” said Frank O’Brien, New England regional manager for the Property Casualty Insurers Association of America (PCI).

“Massachusetts is one of the most highly regulated insurance marketplaces, and this action will put the state in step with the rest of the country and make the Commonwealth a more attractive place for commercial insurers to do business,” he added. (For more on this measure, see page 110 sidebar.)

Among the reform targets is the safe driver insurance plan. Beagan’s SRB has come up with a plan to replace the state’s current complicated plan with a new one by 2006 and amend the current plan until then. The plan is designed to not have any impact on territorial subsidies. Those are being scrutinized in separate proceedings under the state’s complex system.

The biggest reform effort concerns tranforming the state’s current reinsurance facility for high-risk auto policies, Commonwealth Auto Reinsurers (CAR), into an assigned risk plan like other states operate.

But here the reform efforts that had been proceeding surprisingly smoothly have encountered an obstacle. Commerce Insurance Co., the biggest writer of auto coverage in Massachusetts, raised possible legal problems with the reforms, just as the plan was being submitted for approval to Commissioner Bowler, who effectively ordered the reforms. Commerce Insurance Co. wrote to the governing committee of CAR on June 16, warning that many of the changes sought might violate state laws.

“In our view, there are serious questions regarding whether the fundamental components of the proposed new systems comply with applicable laws,” stated Arthur J. Remillard Jr., chief executive officer of Commerce. Remillard is also chairman of CAR’s governing committee.

As laws potential in conflict, he cited the state’s “take-all-comers” law, a law banning disparate treatment of agents, and another preventing disproportionate representation of certain territories or classifications in the residual market system. CAR was to address Remillard’s questions at a special June 29 meeting.

While the private passenger reform at CAR is facing challenges, progress was made on another front. Final rules to change the commercial auto residual market operation to a limited servicing carrier model were passed and sent to the commissioner for her approval, bringing to near closure a process that began more than 20 months ago.