Mass. Lawmakers Anxious About Auto Change, Socioeconomic Factors

Massachusetts lawmakers are anxious about the Patrick Administration’s decision to try competitive rating in auto insurance in 2008 but have stopped short of asking Insurance Commissioner Nonnie Burnes to halt her transition plan.

At a hearing in Boston, several senators from the Financial Services Committee, along with independent agents and at least one insurer did, however, advise Burnes not to permit insurers to use socioeconomic factors such as occupation, education or credit score—or proxies for those variables— in their underwriting or pricing in her final regulations.

Sen. Michael Knapik, Republican from Westfield, repeatedly reminded Burnes and others that elected officials hear from motorists when things go wrong with the auto insurance system and questioned the wisdom of making the change.

“Why are we here? It’s a pretty good environment. Rates are moving in the right direction,” Knapik reasoned. “There will be winners and losers. You are upsetting the applecart. Is it worth moving forward in such an unknown way? I get the calls and I go on the ballot.”

“This is the worst economic policy for urban residents,” said Sen. Diane Wilkerson, D-Boston, vice chair of the committee, who represents an urban district.

Burnes said the time is right to make a switch now precisely because there is no crisis and because indications are that rates should be going down based on insurers’ declining claims and costs.

She tried to reassure the elected politicians that most of their constituents who are good drivers would fare better under the new system. The “losers” would be bad drivers who should pay more, she added.

“There will be constant monitoring,” Burnes promised lawmakers.

The commissioner indicated that she would impose various controls, including a cap on increases in rates for urban drivers and a ban against insurers using various tiers or subsidiaries to offer preferred rates to certain drivers.

“It’s already in homeowners and we don’t want it in auto market,” Burnes said of the tiered-pricing scheme.

While Burnes said she would be “very cautious” about permitting the use of socioeconomic factors, several witnesses questioned why she would even keep the possibility alive.

Sen. Mark Montigny, D- New Bedford, was among the lawmakers uncomfortable with allowing insurers to use credit scoring, occupation or other socioeconomic factors. He urged Burnes to identify the factors insurers may use rather than listing factors they may not use.

Montigny said he “sees a loophole a smart person can drive a truck through” if the state isn’t explicit about rating variables.

“They [insurers] will find ways to game the system,” claimed Montigny, arguing that the state would not be able to keep up with insurers that would find proxies such as amount of insurance purchased for any prohibited variables to “get to the same place.”

Wilkerson noted that the current system “does not allow consumers to be harmed by socioeconomic factors” but suggested the new one could.

Frank Mancini, Massachusetts Association of Insurance Agents, urged that rates be based upon driving record “as much as possible.”

Glenn Kaplan, representing Attorney General Martha Coakley, also opposing the use of socioeconomic factors, warned that the commissioner’s authority could be limited once the state goes into a competitive system and away from the fix-and-establish rate structure. He suggested that in the future insurers could gain more control by opposing her authority to reject their use of certain criteria.

He urged lawmakers to put legislative backstops in place now.

John Kittel of Arbella Insurance, one of the state’s largest auto writers that has opposed the move to competitive rating, told lawmakers that state laws are not as strong as they might think about protecting motorists from insurers’ use of socioeconomic factors.

“Companies can compete without using socioeconomic factors and with transparency,” Kittel testified.

Burnes appeared sympathetic to the calls to ban socioeconomic factors including credit scores but said she needs more time to make a final decision. She said she was “skeptical” about a recent Federal Trade Commission report that insurers say supports their use of credit scores. She said she “doubts” there is a correlation between certain socioeconomic factors and claims that is also not unfairly discriminatory but that she had not made up her mind totally.

Wilkerson and others including former Gov. Michael Dukakis — who plugged a plan to provide no-fault choice to drivers — criticized rates based on territories as unfair. Even Burnes has said she would like to de-emphasize the use of territories.

But John Baldini, representing domestic insurer Liberty Mutual which writes 8 percent of the state’s auto market, warned that restricting insurers’ use of other rating variables such as credit scores could backfire.

“By taking away predictive rating factors, you rely more on territorial rating,” he warned.

Mancini’s agent group, MAIA, has opposed competitive rating in the past but Mancini said his group recognizes the commissioner’s authority to make this change. Now, he said, the challenge is to provide meaningful consumer education so that drivers can take advantage of the new system.

Sen. Stephen J. Buoniconti, D-Springfield, committee chairman, vowed the committee would hold additional hearings after Burnes releases her proposed regulations.

“We can decide to step in and change the rules,” Buoniconti advised.