Proposed Mass. Auto Plan a ‘Trojan Horse’ Designed to Fail, Charges Consumer Advocate

The current proposal to change the Massachusetts auto insurance residual market to an assigned risk plan is “a Trojan Horse proposal designed to fail in order to produce an endless stream of anti-consumer measures in future years,” according to one of the state’s former insurance officials who is now an insurance consumer advocate.

Stephen D’Amato, a former chief of the State Rating Bureau within the insurance department who is now executive director of the Center for Insurance Research in Cambridge, Mass., has blasted an industry-backed plan that would replace the current Commonwealth Auto Reinsurers (CAR) by regulatory order with an assigned risk plan similar to that in more than 40 other states.

D’Amato has urged Commissioner Julianne Bowler to reject the plan to implement the Massachusetts Assigned Insurance Plan (MAIP). He has recommended more modest changes to CAR.

“Virtually everyone believes that CAR is broken. The key question then is how it should be fixed,” D’Amato said at the recent public hearing where he argued that officials simply need to change the formula for dividing the residual market deficit among insurers and do not need to rewrite the entire plan.

A key criticism of CAR has been that its current method of distributing high risk policies is inequitable to some insurers and agencies and is subject to manipulation and abuse. CAR’s operation has been cited as the biggest reason a number of insurers have either withdrawn or declined to enter the state’s private passenger market, where 19 insurers now write.

Most insurers, the state attorney general and the Massachusetts Association of Insurance Agents have supported the MAIP reform, while Commerce Insurance, the largest writer of private passenger coverage in the state, and D’Amato’s organization have opposed it.

Residual market policies are now assigned to carriers in blocks by producer. Under the new MAIP, residual market policies would instead be assigned to carriers on an individual basis. Under the state’s take-all-comers law, insurers could still not refuse to accept any driver but they would be eligible under a credit clearing house plan for financial credits for insuring high risks. The credits would be based on the actual dollar subsidies built into the rates for various classes of drivers by the state’s system of state-set rates.

While the MAIP proposal being reviewed by Bowler does not itself include any provision for a separate rate for assigned risks — a move which would require statutory changes — D’Amato maintains that eventually a separate so-called “dirty” rate and other statutory changes unfavorable to consumers will be sought by the industry.

According to D’Amato, the whole MAIP goes too far in disrupting the current system that he says works rather well for consumers with the changes proposed most heavily affecting urban drivers.

While MAIP goes further than he likes, D’Amato notes that it does not go far enough to achieve the proponents’ main objective of attracting new insurers to the market. He also warns that the residual market will balloon if MAIP is adopted.

“The proffered justification for the proposal — that it will make Massachusetts more like other states and enable us to attract new insurers — is either laughable or alarming. On the one hand, the notion that an assigned risk plan, containing over a million drivers, with a fix-and-established rate, with a subsidy clearing house, without a dirty rate, without reduced agent commissions, all in a state with a long history of legislative intervention on insurance matters, is going to be appealing to State Farm and Progressive, is just laughable,” D’Amato told Bowler.

D’Amato contends that MAIP proponents understand its shortcomings and have other ideas.

“On the other hand, if, as I believe, the real goal is to have a dirty rate, to reduce pool commissions, to adopt the rating laws used in most states, to undo the subsidies built into the existing system, and to allow insurers unbridled discretion in underwriting, then that goal is alarming and, I should add, plainly delusional. This is Massachusetts, not South Carolina,” he said.

South Carolina recently revamped its auto insurance system. Some MAIP advocates have cited its experience as a model Massachusetts officials might follow.

D’Amato charged that the MAIP proposal “is inconsistent with current statutory law…and completely devoid of consumer protections, which is not surprising because it was drafted by the industry.”

Despite what he thinks are major flaws in MAIP, D’Amato and most observers, expect Bowler to approve the plan next month, perhaps with minor changes. If a MAIP is going to be adopted, D’Amato has recommended that it should incorporate certain consumer safeguards, among them:

• There should be underwriting restrictions on who can be placed in an ARP. Insureds who have had no surchargeable offenses during the most recent three years of driving experience available should be ineligible for the ARP and must be written voluntarily by any insurer they apply to for auto insurance.

• There should be a comprehensive list of all underwriting factors that may be considered by insurers in determining whether to deny coverage in the voluntary market. Factors such as credit scoring, race, and sex, as well as the other factors should not be on the list.

• The plan should state that drivers written by an insurer through the plan must receive the same premiums (including all discounts and deviations) and service as drivers written voluntarily by that insurer.

• The burdens placed on drivers who lose voluntary coverage with their existing insurer need to be set forth in the plan. Would drivers with collision or comprehensive coverage need to have their vehicles pre-inspected by their ARP insurer? What forms must drivers fill out once they are rejected by their voluntary insurer? What installment plan would apply to these drivers?

While D’Amato has gotten involved in changing the way residual market loses are distributed, he maintains that he prefers to change the focus of the debate from loss redistribution to loss prevention.

“At some point our efforts must switch from how to divide auto insurance losses to how to shrink them. The adoption of an assigned risk plan would, unfortunately, move us further away from that point,” he said.