The Long and Short of the New Mass. Auto System

The new managed care auto insurance system that is underway in Massachusetts should benefit most consumers as well as the state’s local insurers in the short run, according to a new report by Fitch Ratings.

However, in the long run, consumers will be denied the full benefits of competition unless the state lifts its ban on credit scoring.

Also, a number of local insurers that took advantage of the residual market rules could struggle under the new rules.

The Fitch Ratings report, Massachusetts Private Auto: Drive to Managed Competition, discusses the competitive rating system that goes into full swing April 1.

Overall, Fitch said it expects the new system will benefit both consumers and the marketplace. “Consumers will benefit the most from a wider choice in carriers, innovations in coverage and lower rates for the average consumer,” Fitch says.

However, Fitch maintains that consumers would benefit even more if underwriters were permitted to use credit scoring and other “actuarially significant pricing variables that are believed to adequately reflect risk and have demonstrated value in other markets.”

State limits on so-called tiered pricing will discourage national carriers from entering the market, the report maintains. Until carriers are allowed to use pricing including credit scores, Fitch predicts that “the entrance of new participants will be more of a trickle than a flood.”

Major direct writers including Geico, Progressive and State Farm do not write auto in Massachusetts, where 85 percent of the market runs through independent insurance agents.

The state has 19 auto insurers, with the top three — Commerce, Safety and Arbella — being domestic companies. Two insurers not now writing private passenger auto in the state — Peerless (owned by Boston-based Liberty Mutual which already writes auto in the state) and Progressive (online sales only at first) have announced they will enter the market.

In addition to allowing managed price competition, the state is altering its high risk plan, switching from Commonwealth Auto Reinsurers to an assigned risk plan. Fitch believes the new residual market will have an even greater impact on the local insurers than the new rating system. Certain local carriers did well by mastering the old CAR system. “Those local companies that used the prior residual market system to their advantage will be disproportionately affected by the change,” says the report.

Local companies have enjoyed years of profitability and aggregate combined ratios below 85 percent since 2003, according to Fitch. But they will now find it difficult to repeat that performance given competition from new entrants and pressures to lower premiums at a time when nationwide loss costs are increasing and they must increase advertising.

It’s not all bad news for local companies, however. They “possess an in-depth understanding of the Massachusetts marketplace.” Also consumers are accustomed to buying through independent agents.

But those advantages may be short-term. According to Fitch, “long-term success in the Massachusetts market will belong to companies that offer superior claims service levels and properly price the risks.”