High Risk Pass for New Mass. Auto Insurers Irks Established Players

Massachusetts auto insurers have been operating under a new managed competition auto insurance system for only a month now but a battle is well underway over how to treat newcomers to the state.

The Patrick administration is offering a rule that exempts new auto insurers in Massachusetts from having to accept costly high risk drivers for the first several years of operating in the state— a rule existing insurers that must now accept such risks have denounced as unfair.

Under the rule, newcomers to the market in 2008 would not be assessed for high risks until 2011, with their assessment based on their sales in 2010.

According to rule’s backers, the almost three-year lag period is necessary so that a new carrier in the market has time to build a year of sales upon which high risk assignments can then be based; otherwise assignments would be based on speculation about how much business the new carrier might write.

The supporters argue that the rule is consistent with the way some 40 other states with assigned risk plans similar to the Bay State’s treat new entrants.

But established Bay State players including Arbella Mutual, Plymouth Rock and Encompass say the rule would give new carriers a “free ride” at their expense. The newcomers would not only be able to avoid accepting assigned risks but would also have the advantage of being able to price their policies without factoring in the cost of high risk drivers, a cost that one estimate pegs at as much as $100 per policy.

The state has a new assigned risk plan to apportion high risk policies among insurers. The new Massachusetts Assigned Insurance Plan was created partly in response to complaints that the previous high risk pool did not distribute the high risk burden fairly but favored certain domestic insurers that knew how to manipulate it to their benefit.

Insurance Commissioner Nonnie Burnes heard testimony on the controversial new rule at a recent public hearing.

According to John Kittel, executive vice president of Arbella Mutual, the new MAIP rule issued by Burnes promises a return to the days of unequal distribution of the residual market burden. It would create “artificial advantages” for newcomers that are “potentially detrimental” to competition, he said.

“By providing new entrants with a free ride, during which time they need not write any assigned risks, the rest of the market is subsidizing the new entrant. The new entrant essentially transfers the burden of the residual market to existing writers, and the new entrant can price their business without regard to the residual market load,” he said.

Kittel cited one analysis that suggested a new carrier could price an average risk $100 less than any competitor under this scheme and could write millions of dollars in business without having to assume any residual market impact.

Unlike in other states, assigned risk drivers in the Massachusetts can’t be charged rates higher than those charged in the voluntary market; insurers must recover the extra cost of these higher risks in their voluntary rates. Thus new entries are being given a pricing advantage by not having to account for this expense, argue the established players.

Advocates of the new rule maintain, however, that although other states allow higher rates for assigned risks, regulators in those states frequently delay approval of these higher rates so carriers do not gain the benefit. Also the start-up costs of entering Massachusetts would wipe out any advantage of a delay in paying for high risks, they say.

Progressive Insurance, which began selling car insurance online in the state May 1, supports the rule. The company told Burnes that the concerns raised “are blown out of proportion.” What’s more, the major auto insurer maintained, existing carriers will actually benefit from the rule exempting newcomers because it will help attract new insurers.

According to Emily A. Vlasich, corporate counsel for Progressive, the more new carriers the state attracts to write auto business, the smaller the residual market will be and this will, in turn, mean fewer assigned risk assignments for existing carriers.

She cited experience in New Jersey where the residual market shrunk from 5.9 percent of the market in 2003 to 1.6 percent by 2007 following the entry of GEICO, Progressive, Mercury General and other carriers. These new entrants were not required to accept residual market assignments during their initial years but their entry reduced the size of the residual market “far more than their voluntary market share would have represented in terms of assignments,” claimed Vlasich.

Vlasich projected that based on its experience in other states with residual markets, Progressive’s actual share of the residual market will be “zero” after credits for its voluntary writings are applied.

Progressive says the rule had no bearing on its decision to enter the state. “Because we voluntarily provide insurance to all types of risks, we generally do not get assigned high risk drivers, so the rules around how these drivers are apportioned is generally not a concern,” Cristy Cote, spokesperson, told Insurance Journal.

The most recent insurer to express interest in entering the state, Casco Indemnity, said the rule played no part in its decision to seek entry. William Swetland, president and chief executive officer of the Saco, Maine-based Casco, told Insurance Journal his firm’s decision preceded release of the rule.

Michael W. O’Malley, senior vice president, Chubb, which does not now write auto in the state but has shown interest in the situation, also applauded the rule. He said calling it a “free ride” is a mischaracterization. He said a “time lag in data reporting is essential to achieving true equitable apportionment of the market’s assigned risk obligations.”

Back in the late 1980s, when the state’s auto insurance market was in turmoil and insurers left the market, the state offered an incentive for so-called “newly-emerging” companies that relieved them of some of their high risk pool assessments, a rule some of the insurers now established in the market used to their benefit. That Rule 11 lowered the assessments of companies that were growing rather than reducing their market share.