Mass. Insurers’ Rate and Agents’ Commission Bids Add Up to 9.3%

A request by Massachusetts agents for a 32 percent boost in commissions brings the overall private passenger auto insurance rate hike sought by the industry for 2005 to 9.3 percent, up from the original 5.8 percent figure, according to insurers.

Agents said they would defend their big commission increase during upcoming public hearings.

“That’s what the numbers show,” noted Frank Mancini, president and chief executive officer of the Massachusetts Association of Insurance Agents, which made the commission filing. He was referring to the results of a new agency cost study conducted for the group by Tillinghast that was used in preparing the recommendation.

State and industry officials are engaged in the annual hearings into the setting of private passenger auto insurance rates for next year—hearings, which many of them hope, will eventually be replaced with a system of competitive rating.

But unless and until sweeping reforms are enacted, the proceedings will continue and the commissioner will set rates for 2005.

The Automobile Insurers Bureau had originally asked for an average increase of 5.8 percent but said that figure did not reflect the request by the agents for a jump in average commission from $114 to $151.

If trial lawyers, the attorney general and the State Rating Bureau (the consumer arm of the Division of Insurance) have their say, insurers will be lucky to get any increase at all, judging from testimony at a hearing held Aug. 31.

The SRB’s Kevin Beagan told Insurance Commissioner Julianne Bowler that the combined request of insurers and agents “would be an excessive rate not permitted under Massachusetts law.”

Beagan also criticized the AIB’s filing for improperly calculating the profit and for failing to fully account for lower claims due to successful anti-fraud activities in Lawrence and other cities.

Beagan took exception to the argument that auto insurance is not profitable in the state, citing a loss ratio in 2003 for insurers of 67.6 percent. “It is generally accepted that this value indicates that writing private passenger automobile insurance is a reasonably profitable undertaking for the companies,” he said.

Attorney general criticism
The line has in fact been too profitable, in the eyes of Peter Leight, assistant attorney general in the insurance division, testifying on behalf of Attorney General Tom Reilly.

Leight said that of the $240 million sought by the insurers in its original 5.8 percent filing, half is profit. “The insurers’ added profit is completely unjustified,” he told state officials.

A quarter of the increase, or about $80 million, is for an “unreasonable” increase in expenses, Leight continued. He said this reflects “excess and profit sharing commissions” which consumers should not be asked to pay.

Finally, Leight said, the industry is asking for a similar amount—$80 million—to cover losses despite the fact, he contended, that losses were flat in 2003. “(T)he insurers’ rate request asks policyholders to pay higher premiums to cover as yet unrealized losses,” he commented.

“Excessive insurer rate increases have been the norm in Massachusetts,” Leight argued. He maintained that insurers have over-predicted losses an average of 4 percent a year over the last decade, which he said translates into “hundreds of millions of dollars of excess profits.”

“The rates have been too high and yet every year the AIB seeks higher and higher rates and more and more profit,” Leight charged.

The job of defending the insurers’ rate hike fell to Daniel Johnston, president of AIB, who acknowledged that insurers are asking for a higher expected rate of return of 10 percent compared to the 7.7 percent allowed in 2004 rates. Even the 10 percent, he maintained, is below the Value Line’s 14 percent estimate of what the industry as a whole nationwide will earn in 2005 and the 17 percent that has been reported for New Jersey insurers.

“If you want to send a signal to those companies that might consider doing business here in the future, as well as to those companies who continue to provide a marketplace here, today, then adoption of a 10 percent cost of equity in your profit model will be a significant and prudent first step,” Johnston testified.

This year’s filing from the AIB also contains changes in rate subsidies and in the way motorcycles are priced.

Trial attorneys also opposed the industry request, although Michael Najjar, speaking on behalf of the Massachusetts Academy of Trial Attorneys, did commend the industry for its work in Lawrence cracking down on fraud. “It is hoped that as pending cases make their way through the criminal system, some deterrent lessons will result,” the attorney testified, suggesting the state does not need “bogus claims tainting the pool of truly injured individuals.”

But reduced fraud alone may not reduce premiums, Najjar predicted. When it comes to the industry’s rate request, “there is no necessary link between lower costs and lower premiums,” he contended. “Lower costs may only mean higher profits.”

The hearings will continue with questioning of actuarial and financial experts before the commissioner announces a decision, usually on the deadline of Dec. 15.

MAIP amendments sought
Meanwhile governing committee members of the residual market’s Commonwealth Auto Reinsurers (CAR) held their first meeting on Sept. 9 to consider amendments to its replacement, the Mass. Assigned Insurance Plan (MAIP), that were ordered by Bowler.

While commending the proposed MAIP as a “solid framework for residual market reform and transition,” Bowler nevertheless asked CAR to address several concerns:

• Clarify the rules so that drivers with good driving records are not impacted by the changes in the residual market.

• Adopt the so-called “Clean in Three” proposal, under which experienced drivers with no-fault accidents or moving violations in the most recent three years cannot be placed in the assigned risk plan.

• Introduce incentives to encourage insurers to create new agencies in urban areas.

Bowler also asked for tougher anti-fraud incentives and steps to reduce consumer confusion during any transition to the MAIP.

Bowler asked CAR to submit amendments by Sept. 24 and scheduled a hearing on the changes for Oct. 4.