State insurance commish puts premium on fairness

Dan Devine

Questions still linger about the impact of recently announced changes to the state’s car insurance system on drivers in urban areas like Roxbury and Dorchester.

While the state Division of Insurance maintains that rates will decline in 2008 “for good drivers, irrespective of where they live,” consumer advocates and elected officials — burned once before by the onset of competition in the auto market — remain skeptical.

The ongoing debate was renewed last week after state Insurance Commissioner Nonnie S. Burnes announced her decision to allow insurance companies the freedom to set their own rates.

Burnes’ decision was made after a series of hearings, during which she was warned by state Attorney General Martha Coakley that allowing insurance companies freedom could mean higher rates for drivers.

Based on industry calculations, Coakley’s office reported, premiums in Boston might increase by about 20 percent. The increases could be as high as 35 percent in Roxbury and Dorchester, and as high as 20 percent in Lawrence, Chelsea and Brockton.

Burnes disputed those numbers in an interview with the Banner. She said she hired a consultant to determine a reasonable estimate for the impact on those neighborhoods.

“We did not see anything like 20 percent or 35 percent,” Burnes said. “In fact, we saw decreases.”

While the numbers may not be in agreement, one thing is clear to Burnes.

“I have the authority to make sure that rates are fair and reasonable and that the companies must treat every insured [person] equitably, and if the rates come in and they don’t fall into those parameters, then I will disapprove them,” she said.

Though the commissioner does have that authority, consumer advocates are still troubled.

“I would be very concerned about what will happen to my rates [if I lived] in any urban community,” said Deirdre Cummings, legislative director of the Massachusetts Public Interest Research Group (MassPIRG), a local consumer advocacy organization.

Burnes, a former Superior Court justice appointed in February by Gov. Deval Patrick, issued her decisions in a July 16 letter, claiming that the changes would lead to “more choice, more transparency and lower premiums for consumers” in the state.

Her decisions came on the heels of a report released in March by the Massachusetts Auto Insurance Study Group, a panel appointed by Patrick to study ways of reforming the state’s auto insurance system. The group’s recommendations included moving toward competitive, market-based rates, which the panel called “essential to attract and retain insurers to write this line of business in the Commonwealth.”

Nineteen insurers currently write auto insurance policies in Massachusetts. Since 1990, 35 companies, including national carriers, have left the market.

After a lengthy review, Burnes elected to scrap the so-called “fixed and established” system in favor of introducing a new plan called “managed competition,” under which each insurer will be allowed to propose their own rates.

According to state law, the insurance commissioner must review whether competition in the insurance market is either “insufficient to assure that rates will not be excessive” if opened up to the free market — meaning conditions exist where a single company or small group of companies could charge exorbitant rates — or “so conducted as to be destructive of competition or detrimental to the solvency of insurers” — meaning that a single company or a small group of companies could corner the market, forcing competing insurers to charge rates so low they would eventually go out of business.

In Burnes’ judgment, the current Massachusetts auto insurance market doesn’t meet either condition, and no evidence she heard during the rate-setting process convinced her otherwise.

“No one in this proceeding provided any facts that would support a finding that competition within the private passenger motor vehicle insurance market is either,” the commissioner wrote in her decision.

During the proceedings, several companies argued that competition would enable them to bring to the Commonwealth “innovative products and discounts,” such as unlimited accident forgiveness and good student discounts, that are available to drivers elsewhere, but not here.

Coakley indicated that the role of her office in the new system will be to advocate for consumers “on an insurer-by-insurer basis as carriers submit their proposed rates to the Commissioner for approval,” as opposed to calling for a lower statewide rate in the current system.

“We are committed to carefully reviewing each of these submissions and taking action as needed to protect consumers and ensure that all drivers have access to affordable and adequate insurance coverage,” Coakley said in a statement.

The new competitive rates should be available for consumers with policies renewing on or after April 1, 2008, Burnes said.

MassPIRG’s Cummings said her group supports competition, so long as it is based on driving records and not other factors that may be discriminatory.

“We, like all consumers, want insurers to be able to compete, but to do so without using unfair rating or underwriting practices or gouging the public,” Cummings said in a statement released last Tuesday.

In the current system, insurers cannot use irrelevant criteria such as occupation, gender or marital status to determine whether or not to insure a driver; however, use of “territory,” the geographical area in which the driver’s car is garaged, has been considered to be racially discriminatory.

Burnes has not yet provided a regulatory framework to govern managed competition, but said she would “soon introduce [one] to provide guidance to insurance companies and assurance to consumers,” she wrote in her announcement. “I wish to remind all that the Commissioner retains broad statutory authority and regulatory powers to take corrective actions should any insurer seek to take advantage of the changed environment.” Those powers include the ability to disapprove rates before they become effective, prevent rates that are unfairly discriminatory and to step in after rates go into effect if they appear in any way excessive.

If consumer advocates and urban drivers seem overly cynical, it may be because the last time competition was introduced into the state’s auto insurance market, it didn’t work out so well.

In November 1976, 111 insurance companies submitted rate filings to the State Rating Bureau of the Division of Insurance to go into effect on January 1, 1977, all of which were allowed by the commissioner. While the overall average rate increase across the state was just a few points higher than it had been for the previous year under the fixed and established system, the rates in certain urban areas — including Dorchester and Roxbury — skyrocketed, while some rural areas saw significant decreases. According to the Division of Insurance’s June 1978 decision regarding auto rates, the 1977 decision to allow competition resulted in rate increases ranging from 50 percent to 100 percent for young and urban drivers.

To remedy the spike, the state Legislature enacted in August 1977 an automatic reduction of the 1977 rates for drivers whose rates went up more than 25 percent. A hearing convened by then-Commissioner James M. Stone to review the effects of competition on both the market and consumers resulted in the commissioner determining there was no assurance that competition would prevent rates from being excessive, leading him to decide to fix and establish all auto insurance rates.

In the 30 years since, repeated efforts to institute some form of competition have all fallen by the wayside. But given the status of a market she called “healthy and robust” — marked by three straight years of declining rates that have seen premiums reduced by more than 22 percent to an average statewide cost of about $900, with a fourth consecutive drop expected for 2008 — Burnes decided now was the time to step out of the shadows of the ’77 disaster.

While much attention has focused on Burnes’ competitive rate-setting plan, it is her second decision that has consumer advocates most pessimistic about the future of urban drivers.

That decision adopts an assigned risk plan to change the way so-called “high risk” drivers are distributed among insurers. Burnes said the move was designed “to provide companies more control over the risks they cover in the non-voluntary market and encourage companies to provide better service than they have in the past to people insured in this market.”

The non-voluntary, or “residual,” auto insurance market in Massachusetts is governed by the Commonwealth Automobile Reinsurers (CAR). CAR is an industry-operated reinsurance plan that provides insurance access to those drivers whom individual insurance companies have decided they will not insure. Every company licensed to write auto insurance in Massachusetts is required to become a part of CAR.

Though CAR is frequently referred to as the “high-risk pool,” a 2004 report written by Stephen D’Amato of the Cambridge-based Center for Insurance Research argued that term was a misnomer, because CAR drivers are not necessarily unsafe operators — more than a quarter of the drivers in CAR at the time of the Center’s report had the safest ratings in the state’s Safe Driver Insurance Program.

Under the system, a driver can go to any insurer he or she chooses for coverage, and the insurer must accept that driver’s business, even if the company does not want to write coverage for that particular individual. However, if the insurance company does not want to accept sole risk for the driver, it can then choose to “cede” that driver to CAR.

Any net losses the company faces as a result of insuring drivers in the residual market are spread out among the various insurers. The insurance company gets reimbursed by the entire insurance industry for the cost of covering that driver. This way, nobody can be summarily denied insurance, drivers can choose whichever insurer they want and individual insurance companies don’t have to accept full responsibility for losses caused by someone they don’t want to cover.

According to the Center for Insurance Reform’s 2004 report, nearly 42 percent of drivers in Roxbury and 35 percent of drivers in Dorchester were ceded to the CAR pool in 2002, by far the highest cession rates in the state for that year.

Burnes’ decision implements an assigned risk plan to take CAR’s place in governing the residual market. Under the assigned risk plan, responsibility will no longer be shared among the entire insurance industry. Each insurer will be solely responsible for losses produced by individual customers assigned to it. The new plan went into effect with the commissioner’s decision, but customers cannot be placed into it until April 1, 2008.

At issue is the method by which drivers who have been rejected by an insurer and relegated to the residual market would be assigned under the new plan. Under the current system, drivers ceded to CAR still have the opportunity to choose the company they wish to insure them, whereas the assigned risk plan will designate rejected drivers by way of a random lottery system to insurance companies based on the company’s share of the state’s voluntary insurance market. For example, if a company has 30 percent of the business in the voluntary market, they will be responsible for no more than 30 percent of the risks allocated to the residual market.

The aim of the process is to provide a more even division of the losses associated with ceded drivers, a reorganization sought by some insurers who felt they were bearing an unfair amount of the burden in the residual market.

But consumer groups MassPIRG and the Center for Insurance Reform believe the plan means drivers will lose the opportunity to select their own insurance company, as well as access to lower prices and certain discounts, which could mean that they wind up paying more for coverage.

“Based on industry estimates, eventually more than a million drivers are expected to be rejected annually under the proposed plan” the advocacy groups wrote in a joint statement, saying that 25 percent of state drivers could be affected.

In her interview with the Banner, Burnes said she was familiar with the advocates’ concern, but she remained unconvinced.

“I have heard [that claim], and I have asked for any data that would support it, and I haven’t seen anything that would support the notion that somehow this will balloon to 1 million drivers,” she said.

Rep. Robert Spellane, D-Worcester, who serves as vice-chair of the state House of Representatives Joint Committee on Financial Services and worked for more than 10 years as an independent insurance agent in Massachusetts, echoed the commissioner’s statement.

“The number of consumers who are going to go into the assigned risk plan has been far overstated,” said Spellane. “We assume that 1 to 2 percent of drivers — which may be perhaps 40,000 drivers — would be affected.”

Spellane said that other states that have introduced an assigned risk plan have seen the size of their residual markets grow over a three- to five-year period to 1 to 2 percent of the marketplace.

James Harrington, executive director of the Massachusetts Insurance Federation, a trade association of insurers, said adopting an assigned risk pool will help discourage fraud and hold down rates.

Material from The Associated Press was used in this report.