Rate setting factors take center stage in auto insurance plan

Dan Devine

Calling it the next step in an “ongoing and evolving process,” state Insurance Commissioner Nonnie S. Burnes last week released draft regulations to govern managed competition in the Massachusetts automobile insurance market.

The proposed rules, part of the most drastic changes to the state’s system in the last 30 years, set a framework for transitioning to a system where insurers set their own rates. Previously, the commissioner determined the rate that all insurance companies must charge.

The regulations provide for a one-year transition period from April 1, 2008, when the change goes into effect, through March 31, 2009. Burnes retains broad authority to strike down rates she deems unfairly excessive or discriminatory.

“This is an ongoing and evolving process that we are going to keep track of, because we expect that the market will continue to be competitive and we’re going to be regulating it with that objective,” Burnes said in an interview.

The regulations identify a driver’s experience and driving record as the primary factors that insurers must consider in setting premium rates, and prohibit insurers from considering certain socioeconomic factors in setting rates and choosing whether to cover drivers.

“I have repeatedly expressed my extreme skepticism about socioeconomic factors and my belief that prohibiting their use is good public policy and beneficial for consumers,” Burnes said in a statement announcing the regulations.


But consumer advocates argue that the plan still leaves the door open for insurers to use discriminatory practices that could hurt some drivers — particularly those with low incomes and who live in urban areas.

In a joint statement, the Massachusetts Public Interest Research Group (MassPIRG) and the Center for Insurance Research (CIR) expressed concern that some drivers will be made unnecessarily vulnerable.

“While MassPIRG and the Center for Insurance Research are pleased that the Commissioner has banned some unfair rating and underwriting factors, [she] has opened the door to the use of a slew of other unfair factors that have nothing to do with a consumer’s driving record,” the statement said.

At the heart of the debate lies the issue of using drivers’ credit scores and information from credit reports.

The draft regulations forbid insurers from using the scores or report information in setting rates during the transition period, a prohibition designed to give the state Division of Insurance the opportunity to further study the use of such data, Burnes said.

Advocates maintain that credit scores should be permanently banned from consideration in rate setting.

They also fear that Burnes has left a dangerously large loophole by refusing to prohibit insurers from using the scores in deciding which drivers they will cover.

“[D]espite the Commissioner’s stated reservations about the use of credit scores in insurance, her regulations do not prevent an insurer from using credit scores as a factor in determining whether to reject a driver for coverage altogether,” the MassPIRG/CIR statement said.

Burnes said that making a final determination without allowing time to consider the potential impact of permitting or banning the scores’ use would be imprudent.

“We have heard loudly, and often from both sides, two different points of view — one that [credit scores as a criterion] are discriminatory and one that they are not,” Burnes said. “And because I don’t know, I don’t want to get it wrong. If they should be used because they’re fair, then we should allow them. But if they shouldn’t be used because they’re unfair, then they shouldn’t.

“And because this is not just an auto problem — we certainly see requests to use these factors in homeowners’ [insurance] — we want to make sure that we get it right across the industry.”

Another sticking point is the method of defining the factors insurers may consider in rating and underwriting.

The draft regulations state which criteria are banned from consideration — in setting rates: gender, marital status, race, creed, national origin, religion, age (except to provide discounts to drivers over 65), occupation, income, education and homeownership; and in underwriting: those, plus the principal place of garaging one’s vehicle.

Advocates argue that identifying only the banned factors — as opposed to solely those allowed — still enables insurance companies to use other socioeconomic characteristics that have the potential to be disproportionately harmful to low-income, minority and urban drivers.

“In order to protect against discrimination … it is necessary for the Commissioner to list expressly all the rating and underwriting factors that may be used by insurers,” the MassPIRG/CIR statement said.

Burnes said she believed writing into the regulations only the rating factors that can be used “would not be a consumer-friendly thing to do, because we want to be able to give insurers the flexibility to be innovative, entrepreneurial and creative in making opportunities for consumers.”

The Division of Insurance will hold a public hearing on the draft regulations on Sept. 20 at 10 a.m. at the division’s offices, located at One South Station, Hearing Room A (5th Floor) in Boston. Burnes will issue final regulations in October.