Why Mass. Should Keep Its Current Auto System with State-Set Rates

I agree with Gov. Romney that improving road designs, dangerous intersections and combating fraud will go a long way to lowering automobile insurance rates in the Commonwealth of Massachusetts. But I disagree with his assertion that eliminating our system of fixed and established rates will lower premiums. In fact I believe it will bring the opposite result to many.

In a recent report authored by Robert J. Shapiro based on 2002 data provided by the National Association of Insurance Commissioners, he, like the Governor, alleged that our drivers pay more because of our system. Based on the 2002 data he used, he notes that Massachusetts ranks fourth in the country in auto rates.

But had he used 2003 data provided by the NAIC, he would have told you we had dropped to number six, with both Louisiana and Rhode Island passing us in this ranking. I also suspect that once the 2004 and 2005 data are made available, we will have fallen further down the list and this is with having the designation of being first in the nation in claims.

Mr. Shapiro also suggests that one of the problems with our system is we do not penalize drivers for filing claims, but instead penalize only those who are at fault in accidents. In other words, constituents who finds themselves rear ended while waiting at a red light should pay a higher rate based on the fact they were an innocent party in an auto accident. That is what would happen under an open competitive rating system.

Smaller profit margins

He also notes another problem with our system is that regulators consistently set rates that produce smaller profit margins for insurers. In 1999, South Carolina abandoned an auto system much like ours. That year their average premium was $702.50 and by the year 2003 under the system Mr. Shapiro and the Governor advocate, the average premium increased 23 percent to $865.51.

Mr. Shapiro and the proponents of this competitive rating legislation have failed to explain why under their system at least five other states have rates higher than ours, yet those states do not lead the nation in claims. Could it be that our system of fixed and established rates is the reason?

Please also remember that GEICO and Progressive have stated their entry into our market is predicated upon two factors: First, they will decide to whom they sell their product and, second, at what price. Our senior citizens currently enjoy a 25 percent discount on their rates, but Mr. Shapiro notes in some states such as New York an additional premium is added for senior drivers. In true open competition, underwriting/rating factors such as age are commonly used. If there is a ban on the use of some factors which insurers use, will out of state carriers opt not to enter our market?

The most significant difference between our current system and this proposal is ours is based upon what a driver has done, while theirs is based upon what they think a driver will do. We determine an individual’s rate based on three factors: driving record, years of experience and location, with driving record carrying the most weight. Under the Governor’s system, there are many factors that will be used to determine an individual rate with credit scoring being the most significant change.

Earlier this year the Commissioner of Insurance in Delaware filed legislation banning the use of credit scores in determining insurance rates. He cited the high number of errors contained in these reports as the primary reason for his opposition. He also found that people who carry balances on credit cards or have outstanding loans were denied the best rates offered.

In addition to credit scoring, other factors likely to be used in determining an individual’s rate will include not at fault accidents, incidents of other household members, comprehensive losses, financial stability, prior coverage, among other factors. Their definition of incident is “all violations and accidents regardless of the amount paid.”

Remember, Mr. Shapiro found fault with our system because we don’t penalize people for filing claims. In addition to all these requirements, drivers still don’t receive the best rate unless they carry at least $100,000/$300,000 bodily injury limits, show proof they have been insured for the past 12 months with bodily injury rates higher than the state minimum limit, and have at least one vehicle with full coverage. These are actual underwriting rules in states that have open and competitive rates.

Proponents of change cite statistics that 80 percent of the drivers here in Massachusetts are “good drivers.” Their advertising leads one to believe everyone who is part of the 80 percent will save money under their system. But given that they use credit scoring, penalize drivers who file claims even though they’re not at fault, and require customers to carry high limits to obtain their best rates, how many drivers who receive the best rates under our system will receive them under theirs?

Right direction

Given the expected rate reduction for the year 2006 and the substantial changes made to our safe driver system, good drivers will see significant rate reductions in the coming year. Coupled with the changes to our residual market that will level the playing field for carriers, we are moving in the right direction. Remember, under our system the commissioner sets the maximum automobile insurance rate every year, and there are no prohibitions for companies to compete for business. Given the two systems, consumers will be better served by the commissioner continuing to set the maximum rate a company can charge. I urge the committee not to include a competitive rating provision in whatever auto insurance reform bill it puts forth.

Joseph P. Leahy Jr. is an independent insurance
agent and immediate past chairman of the

board of directors of the Massachusetts

Association of Insurance

Agents. He made his remarks
before the Joint Committee

on Financial Services as it
considered auto insur-

ance legislation filed by Gov.

Mitt Romney.