Mass. agents cautious on assigned risk plan

Massachusetts Insurance Commissioner Julianne Bowler has been given the green light by the state’s high court to proceed with installing an auto insurance assigned risk plan and she appears intent on doing so.

On Aug. 23, the Massachusetts Supreme Judicial Court unanimously ruled that she has the authority to create an assigned risk plan to replace the existing reinsurance plan, known as Commonwealth Auto Reinsurers, for insuring high-risk drivers.

Insurance agents, who had some qualms about the plan Bowler unveiled in December 2004, hope she will invite public input to flesh out the details before going forward.

“When it was announced, we had some issues with it. But the courts stepped in,” noted Frank Mancini, president and chief executive officer for the Massachusetts Association of Insurance Agents.

One of the issues agents and others raised was the language banning the ARP from accepting risks with clean driving records for the past three years. Proponents of this rule were concerned that these risks would end up in the residual market rather than with an insurer of their choice. The court also said this was a problem. “I would think the thing to do would be to hold a proceeding on the ‘clean-in-three’ and also hold a public hearing on the entire ARP,” said Mancini.

Mancini’s group would also like to see Bowler address the issue of access by agents to the residual market. “We still don’t have equality between voluntary and involuntary agents,” Mancini notes, citing the fact that while exclusive representative producers (ERPs) who write only with the residual market have unlimited access, voluntary agents’ face limits on their use of the residual market.

Several domestic auto insurers, including Commerce Insurance and Arbella Mutual Insurance Company, along with the Center for Insurance Research, had fought the ARP. Now that they have lost in court, some of these critics are questioning the necessity of an ARP.

“Although the court concluded that the commissioner has the authority to implement an assigned risk plan, the decision by no means requires her to do so,” said James A. Ermilio, executive vice president for Commerce Insurance. In a prepared statement, Ermilio argued that the reassignments of CAR business that took place earlier this year plus the fraud fighting activities that have contributed to a lowering of rates make the ARP unnecessary.

But Bowler backs the ARP system in part because it resembles the residual market systems in 42 other states. “We’re one step closer to operating like a normal market,” she told Insurance Journal. Bowler was referring to the fact that 46 states utilize ARPs.

While there are issues that need to be addressed, overall she feels the ARP that goes into effect will look much like the plan as she approved it in 2004.

While she sees the ARP as a “huge first step” toward attracting new insurers, Bowler warns that the ARP alone will not dramatically alter the marketplace.

For agents, Mancini thinks the ARP could swing both ways. “For some agents it’s a concern; for others it may be an opportunity,” he said. If it functions well, it could mean more of the state’s 600 ERPs could get voluntary contracts, he added.

Bowler believes additional reform is needed. In her view, the Legislature should permit separate pricing for a “dirty” rate for risks in the ARP. “I can’t set a different rate for the ARP; that would require statutory change,” she noted.

Mancini agrees that statutory change would be needed to accomplish a “dirty” rate. His group has a position on this, one that might conflict with insurers’ wishes. “A dirty rate is okay as long as it is based on objective criteria,” Mancini offered.

Bowler’s ultimate goal is a system with prices set not by the state but by insurers themselves. She thinks the time is right to make the switch. During her four years on the job, she has all but eliminated the built-in rate subsidies for bad drivers and young drivers that have been cited by insurers as obstacles to competition. Also, insurers are making money, as evidenced by the industry’s own recommendation that rates be cut for 2007. These conditions bode well for a smooth transition in which steep price swings might be avoided, she argues. “Competitive pricing is the next step,” she said.

Legislation to phase-in competitive rating over a five-year period utilizing “flex band” rating has been languishing on Beacon Hill, in part due to opposition by agents.

“For some agents it’s a concern; for others it may be an opportunity.”