Mass. Commissioner Facing Facts About Auto System

It’s time for Massachusetts to face the facts about its old ways of tightly regulating private passenger auto insurance and create a modern day system, Massachusetts Insurance Commissioner Julianne Bowler told agents last month, just days before she unveiled the state’s new residual market plan. (See story on page 18.)

Bowler told agents that government has for years “largely ignored” the failings of the present system and “kept the mantra that auto insurance is a social good to be subsidized by the companies.”

Bowler was speaking before a gathering at the annual convention of the Massachusetts Association of Insurance Agents (MAIA) days before announcing final reforms to the state’s auto high risk auto plan.

She suggested that state lawmakers and public officials have all had access to the facts about the current system’s flaws but have not acted on them. Among the facts to be confronted are that Massachusetts leads the nation in both property damage liability and bodily injury claims frequency; certain communities are “off the charts” in terms of claims frequency; and certain inexperienced drivers have very high claims numbers –but the system does not make these drivers pay their fair share.

Bowlers dismissed some of the common explanations as to why the state’s auto rates are so high and instead suggested another theory.

“I grant you that Massachusetts has unpredictable weather patterns, congested urban centers and a challenging roadway, but then again so do Connecticut and Rhode Island and they both have lower claims frequency. Why is that? Could it be that the financial consequences of being an aggressive or bad driver in these states is real, whereas in Massachusetts it is significantly tempered as a result of our system of subsidization?”

On Nov. 23, Bowler announced the final rules for transforming the state’s current residual market Commonwealth Auto Reinsurers (CAR) into an assigned risk plan known as the Massachusetts Assigned Insurance Plan (MAIP).

She said changes to CAR are needed to more fairly distribute residual market losses and control costs. But she stressed that a move away from the system of uniform rates set by the state will also be needed to attract more capital and insurers to the state, as will modifications to current rate subsidies for certain high risk territories and inexperienced drivers.

“We will fix CAR,” she told agents. “We will fairly distribute the financial burden of the residual market but we also must face the fact that while fixing CAR is necessary, it will not be sufficient to get national companies into Massachusetts. For that to occur we need to end the annual passion play — and create a flexible rating mechanism and policy options that allow companies to compete on price and service. Massachusetts’ policyholders are not stupid. They are better able to determine what their individual needs are and what they are willing to pay for a lot better than government can.”

Bowler analyzed the current auto market from the perspectives of consumers, the industry and a regulator.

Policyholders see rates as too high but have no real understanding of what causes rates to increase, she said. Even the 14 percent of drivers who she said are heavily subsidized in the system think rates are too high. Most consumers relate only to their insurance agent and don’t care how many insurance companies there are or what financial condition they are in, she added.

At the same time, nobody in the industry thinks rates are too high, she said. Most in the industry believe the residual market needs to be fixed and agree on how to fix it. Outside insurers “believe both the voluntary and the residual market are broken and will not enter until rates are deregulated,” Bowler continued.

As for agents, they “are whipsawed among the remaining carriers – either because they have lost their last voluntary contract or because their carrier has headed for the exit – forcing them to move their books of business, which costs them money and inconveniences their customers.” The Massachusetts regulator maintained that over the last five years some 650,000 policyholders have lost their carrier of choice either because it has left the market or because it curtailed its writings.

As a regulator she is concerned that the number of companies writing auto is dwindling (53 in 1990; 27 in 1998; 18 in 2004) and that 70 percent of the market is held by just five insurers. “You can’t lose 67 percent of a market’s capital base in 15 years and seriously believe that everything is fine,” she commented.

“You know when Henry Ford first mass produced the automobile and folks wanted to choose their own colors, he said you can have any color you want so long as it is black. That is not too different from Massachusetts auto insurance. The customer can have any policy he wants as long as it is the one mandated by the state with a rate set by the state – the same for all. Well, we are not longer living in the 1930s. I think it is high time our auto insurance market reflected the reality of 2004,” Bowler said.