Managed Competition: Year Two | How have changes in auto insurance impacted carriers, agents and drivers?
In April 2008, the world of Massachusetts auto insurance changed.
The decades-old highly regulated system, in which the state essentially set premium costs, was replaced by “managed competition,” allowing insurance companies to set their own rates within boundaries imposed by the state.
Advocates promised that the system would lure more carriers to Massachusetts, and more competition would mean lower rates for most drivers. Opponents warned it would lead to discrimination against particular groups of drivers and could devastate the state’s independent insurance agents.
So far, none of these predictions has fully come to pass, but there is evidence that all of them are happening to one degree or another. Here’s a rundown of how things look these days for the three major players in the auto insurance industry: the carriers, the agents and the drivers.
The Carriers
The biggest headlines since the start of managed competition have come from the entrance of three big names into the Massachusetts market. The Progressive Group started selling policies in the state in May 2008. Geico did the same a year later. And Allstate Insurance Co. plans to follow suit in November, assuming it gets the regulatory approval it needs.
All three are direct writers, selling policies through web sites or 800 numbers and bypassing local agents. But with Allstate not open for business yet and Geico a brand new variable, it’s not clear yet what their presence will mean to carriers that are more established in the state.
As for Progressive, the company said it had about 56,000 policies in the state by the end of 2008, for revenues of about $46 million.
But the state is still revising the regulations on auto insurers. Frank Mancini, president and CEO of the Milford-based Massachusetts Association of Insurance Agents, said the big companies could easily pull out of the market again if they don’t like the way that process goes.
“Their commitment to Massachusetts at this point is a web site and an 800 number each,” he said. “We’ll see how long their commitment is.”
Meanwhile, about a half-dozen other insurers that do work with local agents have also entered the state, adding to the competition.
One outstanding debate over the new carriers involves a state policy that exempts them from immediately paying into the “assigned risk” pool that covers drivers who can’t get coverage elsewhere. State officials say the delay is common practice in other states and allows companies to develop a track record so they can be billed appropriately. But established Massachusetts carriers and agents have said newcomers ought to be required to start paying into the pool right away.
Jack Woods, president of Worcester’s Thomas J. Woods Insurance Agency Inc., and president of the Worcester County Independent Insurance Agents Association, said that with a product like insurance that is entirely cost based, adding extra expenses to some carriers but not others offers an unreasonable advantage.
“It’s not fair to tell somebody who’s coming in new to the game that they can do that without any of that cost,” he said. “To just give them carte blanche that they don’t have the bill is just not right.”
The Agents
For insurance agents, managed competition came with the distinct fear that customers would abandon them for direct writers. And with some reason. According to Mancini, independent agents write about 78 percent of car insurance policies in Massachusetts, but just 30 to 35 percent nationally.
So far, agents say direct writers haven’t made enough headway to have a big impact on their business, and Mancini said the effect may never be as huge as the national numbers suggest: in New England states about 60 percent of policies go through agents.
“I think people in this part of the country just like to do business with the guy down the street,” he said.
For very small agencies, though, the story is different. Many of them have always handled policies for just one or two carriers and either can’t attract others or can’t handle the increased complexity of dealing with many insurers. That can force them to either join a network that handles much of their administrative work or sell to a larger agency.
“The merging thing has been huge,” Woods said.
Even for large agencies, helping customers compare policies from multiple carriers is an expensive proposition—it takes new software, more paperwork and special training for agents. And it means more time finding the right policy for each person.
Bill Braley, vice president of the Worcester-based Braley & Wellington Group, said his company has faced all those pressures and then, with rates dropping, gotten paid less for the trouble.
“For us and our personal lines staff it’s been a lot of work to rerate all of these customers and make sure we’re doing our best for them,” he said. “When I hear someone say you’ve just saved me 3 or 4 or 500 dollars, my first reaction is ‘Oh that’s wonderful.’ But our income follows from that fairly directly.”
Woods said his company’s revenues have actually declined 10 percent even as it added more customers, simply because of the drop in premiums.
The Drivers
When it comes to rates, bad news for the agents should be good news for drivers, so it might be easy to conclude that customers are getting a good deal from managed competition. And, indeed, when the state Division of Insurance looked at the rates that companies put into place in April 2008, the average had declined 7.8 percent from the previous year. But rates had already been falling in previous years. Mancini said many in the industry thought the decline might even have been steeper under the old system.
“Whether we stayed with fixed and established or went to managed competition, rates were going down,” he said.
Still, agents say they’re pleased with the deals they’ve been able to find for many customers. For example, many homeowners can now save money by combining their auto and homeowners insurance and taking advantage of carrier discounts.
“There’s been coverage innovation, and there are opportunities for savings that we’re seeing,” said Braley.
For a minority of customers, though, the new system has not brought such good deals. State regulations forbid insurers from basing rates on factors like income, credit scores and age, but many say they’ve been able to skirt those rules — for example, making insurance more expensive for non-homeowners, who tend to be poorer.
Carriers argue that studies link data like income and credit to the likelihood of accidents, but Woods said he’s not so sure. He said his impression is that carriers want to charge more to people with fewer resources because those people are less likely to pay insurance bills on time and more likely to report whatever accidents they have. “My personal feeling on it is that … the people who are of better means and have money in the bank will take care of their own claims and not file them,” he said.
Even for those who have seen their rates drop so far, the good times may not last long. Mancini said auto insurance rates have declined nationally in recent years and Massachusetts will probably follow along, managed competition or no.
And Woods said some companies just entering the market may have set their rates at money-losing levels last year to grab a share of the market.
Once they’re established, he said, the numbers will go up.
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