Auto insurance fight looms again
New bill seeks similar changes to Romney’s 2005 effort
A new auto insurance bill that would let companies set their own premiums and remake the mechanism for insuring high-risk drivers has again touched off a debate among carriers, agents, politicians and consumer groups.
Offered by Ronald Mariano (D-Quincy), chairman of the house Financial Services Committee, the bill seeks changes largely similar to those sought last year by Republican Gov. Mitt Romney.The changes would represent a
huge departure from the way auto insurance works now. Currently, the commissioner of insurance determines rates. Agents, known as Exclusive Representative Producers, are assigned to each carrier proportionately to that carrier’s market share.
Under the proposed changes, individual carriers would set their own premiums for drivers, using criteria that they establish in-house. Those previously unused criteria could include a driver’s gender, occupation or credit. The new bill would also reduce the current subsidy system where suburban drivers pay relatively higher rates so that urban drivers can pay less.
It would also abolish the system of assigning agents to companies in favor of what’s called an assigned risk plan. That mechanism assigns drivers, rather than agents, to companies. The two moves would give companies far greater flexibility in determining who pays what.
Proponents: Greater competition
Mariano has the backing of a strong group of 11 companies. Called the Fairness Coalition for Good Drivers, the membership includes The Hanover Group in Worcester, Liberty Mutual in Boston and The Premier, a St. Paul Travelers Co. affiliate headquartered in Worcester.
The group has picked up where it left off months ago, pushing the message that competitive rating means better ratings for good drivers, and increased competition means a healthier market.
William J. Cahill Jr., Hanover’s vice president and general counsel, says the need for competition is urgent in the auto market. His reasoning? A few carriers dominate both the auto and home insurance markets here. The danger is that in the event of a catastrophic loss – say, a major hurricane – any company that writes home insurance would be assessed losses based on their market share. With fewer companies absorbing those losses, the results for each company could be devastating.
Opening up the market would free companies like The Hanover to rate drivers based on their assessment of a driver’s risk, he says. Large national carriers, such as State Farm, would be free to do the same. And when a large carrier comes back to write auto, they will also write homeowners, better capitalizing the market in event of loss. Competitive rates and an assigned risk pool would better position the industry as a whole to absorb catastrophic losses.
And competitive rate-setting must occur part-and-parcel with changes to the residual market, Cahill says. Only then could the market best determine which risks a company can accept and which it should reject. Remaking the residual market into an assigned risk pool is the fairest way to distribute the riskiest drivers among carriers, he says.
Critics: Changes favor companies
Two companies are leading the charge against the bill, saying competitive rates are unfair and in practice actually punish most drivers. Commerce Group in Webster and Arbella Insurance Group in Boston have spearheaded the main opposition through an alliance called the Massachusetts Coalition for Affordable Auto Insurance for All.
Their argument: Contrary to the statements of reform-seekers, the Bay State’s insurance system actually works quite well at equalizing rates and keeping them affordable. And that’s important because the less expensive insurance remains, the more people will buy.
James A. Ermilio, senior vice president and general counsel at Commerce, cites a 2004 report by the Division of Insurance that compared premiums in MA with states it deemed comparable – CT, NY, CA, IL, MD and PA. Overwhelmingly, it indicates that drivers on the whole pay far less to insure cars here, and the premium differences are much less exaggerated between different groups of drivers.
Ermilio says the bill in effect would give companies the license to overcharge most drivers, and reject those they deem as a high risk using unfair criteria.
That would mean using credit scores, for instance, to decide whether a driver ends up in the high-risk pool, an expensive proposition, he says. Under the current system, only record, experience and garaging move drivers’ premiums up or down.
In the end, the bill is a power grab, allowing large, non-domestic carriers to pull money and insurance jobs out of the Bay State and jump ship if the market is doing poorly, critics say.
And the home insurance argument offered by proponents is "irresponsible" and used to create panic, Ermilio says, because it neglects two very important facts. One is that other larger companies reinsure carriers, so in the event of a loss, they can access other sources of capital. Plus, there’s no reason to believe a carrier such as State Farm would be more inclined to write a home than carriers already here. Coastal home insurance, he points out, is a major concern in every state along the East and West coasts, all of which have competitive rating and still struggle to find companies to write coastal property.
Other join the fight
Consumer group MassPIRG has sided with Ermilio’s coalition, saying the new bill would drive up rates and allow companies to discriminate in pricing customers. "This is a bad deal for consumers," says Deirdre Cummings of MassPIRG. A better solution would be to address the state’s highest-in-the-nation accident rate through better policing, driver education and road improvements, she says.
Estimates by the Center for Insurance Research in Cambridge, an independent, non-profit research group, show that auto insurance premiums for urban drivers could climb by as much as 25 percent in the first year alone, regardless of their driving record.
Frank Mancini, head of Massachusetts Association of Independent Insurance Agents, Bay State agents’ trade associations, says his group anticipates dramatic rate jumps. The group has taken a position against the bill because they believe it unfairly uses non-driving factors such as credit scores or occupation to determine premiums.
It would also make agents’ jobs a lot harder, Maucini says, because they would have to compete with companies like GEICO that use direct-writers and have huge advertising budgets.
Agreeing with this stance is John Koegel, executive vice president of Eastern Insurance Group in Natick. He oversees personal lines coverage for the company’s 20 locations, including Acton, Westboro, Sturbridge and Leominster. "It’s not a good idea right now, given that rates have gone down almost nine percent this year and are expected to drop again next year," he says of the bill.
Not all agents agree the changes would be harmful. Richard A. McGrath, owner of McGrath Insurance Group Inc. in Sturbridge says Mariano’s bill would be an improvement for consumers, particularly for good drivers who he believes would see rates drop substantially. And as far as underwriting criteria is concerned, McGrath says criteria such as credit scoring are used often in other lines of insurance without complaints of unfairness.
Nor is he concerned with competition. "I compete for every other line of insurance I sell. Why should auto be any different?"
It would not be the first time competitive rating has been tried. In 1977, the legislature opened the state to competitive rating, only to abandon it six months later amid widespread confusion and rate shock.
Rep. Robert Spellane (D-Worcester), vice chairman of Mariano’s committee and a strong supporter of the bill, says a repeat of the 1977 experience is unlikely for a number of reasons. First is that the market is sound right now in terms of loss ratios, unlike 1976 where worsening ratios would have raised premiums regardless, he says. Second is that competitive-rating would be phased in over five years, a gradual process compared with the experience 30 years ago.
Others note that every state employs some form of competitive rating and more than 40 use an assigned risk plan to give coverage to the riskiest drivers.
But while it would bring the state more in line with the rest of the nation, critics say the bill would actually damage the Bay State’s insurance system, which they maintain works better than any at keeping rates down.
Overhaul-seekers have a stumbling block this time around. Recent changes adopted by the entity that runs the high-risk pool have made the distribution of high-risk drivers more equitable. Plus, companies are now using a revamped, point-based method of rating drivers’ records, shifting costs to worse drivers.
Uncertain road ahead
With fewer than six weeks remaining in the legislature’s current session, a resolution over Mariano’s bill will come quickly. As of press time, the ways and means committee was still evaluating it, one of many steps before a vote would be taken. Even then, State Senators such as Mariano’s counterpart, Andrea F. Nuciforo Jr. (D-Pittsfield) have vowed to derail the bill if it makes out of committee.
And neither side seems confident it will get its way.
"I am never confident about anything," says Mariano. "I have to work hard and we’ll see what happens." Spellane gave it a "60 percent" chance of passage in the current session, but is highly confident that if it fails, next session will prove successful.
Commerce’s Ermilio says he is "not confident that it will be defeated, but hopeful. We realize we cannot afford to be confident."
Kenneth J. St. Onge can be reached at kstonge@wbjournal.com
SIDEBAR: The Mariano Bill
• Allows companies, rather than the commissioner of insurance, to set their own rates
• Phases in competitive rating over five-year period
• Permits a broader range of underwriting criteria
• Replaces the residual market for high-risk drivers with an assigned risk pool system that distributes those drivers equally among carriers
• Reduces subsidies for urban driver
WBJ Web Partners
Most Recent
Most Recent
0 Comments