After years of industry complaints and months of wrangling among regulators, carriers, voluntary agents, involuntary agents, consumers and lawmakers, Massachusetts has decided how to overhaul its auto residual market system.
Massachusetts Insurance Commissioner Julianne M. Bowler on Nov. 23 issued an order approving new rules for what proponents hope is a more equitable distribution of high-risk drivers among insurers in the state.
Bowler notified the board that oversees the residual market, Commonwealth Automobile Reinsurers’ (CAR), that she approved the new plan and the roadmap for transition with certain modifications. Following a two year transition period, the Massachusetts Assigned Insurance Plan (MAIP) will be implemented as an assigned risk system as of January 1, 2008.
Getting to MAIP from the current system will require phasing-in of various changes that affect insurers and agents. The current residual market mechanism basically assigns residual market risks to insurers in blocks by agency. It also assures that every licensed agent without a voluntary contract can have a relationship with a carrier for business.
The current system has been criticized for unfairly penalizing some auto insurers and agents over others, for forcing a number of carriers to leave a state that is down to only 19 private passenger carriers from 59 back in 1990, for failing to effectively combat claims fraud, and for discouraging the entry of new capital.
Individual risk assignments The new system will assign risks on an individual basis to carriers writing more than two percent of the market on a rotating system. The number of risks assigned to a company will depend on the company’s voluntary market share. Carriers will no longer be forced to take on agents and entire books of business involuntarily. All agents will have the same access to the residual market.
Bowler’s decision marks the biggest reform in private passenger auto insurance in the state in more than a decade. She issued her order over protests by some, including several lawmakers and top insurers, that she lacked the authority to make such sweeping changes and that her adjustments conflict with existing consumer laws.
Mindful of the state’s history of consumer protection and concerns raised by opponents, Bowler insisted upon certain revisions that will mean the state’s residual market, while closer to what operates in many other states, is still not quite like any other.
Unlike in most states where assigned risk rates are higher than standard rates, rates for the MAIP will be the same as in the voluntary market. However, there will be a behind-the-scenes subsidy clearinghouse to allow insurers to collect the correct premium for each insured vehicle in the MAIP without affecting the premium charged to a policyholder. There will also be restrictions on which risks can be placed in MAIP. For one, insurers will not be able to place drivers with clean driving records no matter their territory into the assigned risk plan.
2008 goal Bowler told Insurance Journal that “the goal has always been to get to 2008” with a new high risk sharing system in place. She said her modifications are largely designed to smooth the transition to 2008.
“I have added modifications that are necessary to balance the need for consumer protections with the need to eliminate the inequity in the existing market,” Bowler said. “These changes will eliminate the gaming in the residual market system and motivate insurers to dedicate capital to reduce fraud, lower losses and increase voluntary insurance coverage in all areas of the state.”
Bowler added, “Nothing in this ruling increases the rate policyholders will pay or changes coverage options available to them. It reintroduces healthy market dynamics in order to attract new insurers to our state and ultimately provide agents and their customers a wider array of choices.”
Separate legislation is required to change the way rates are set or to modify the class, territory and other rates subsidies that exist. A task forced named by Gov. Mitt Romney is expected to make recommendations by the end of the year for legislative changes that are needed to further the effort to improve the market.
By “gaming” of the system, Bowler was referring to the activities by some insurers to maneuver so they fulfill their share of the residual market by signing on involuntary agents with good loss ratios, leaving the high loss ratio producers for other carriers to absorb.
Among Bowler’s modifications is one hiking the market share threshold at which an insurer becomes a servicing carrier. She said she hopes this might serve as a slight incentive for new insurers to come into the state since they would not have to assume servicing carrier responsibilities until their market share exceeds two percent.
Bowler also reduced CAR’s formula for servicing carriers’ expense reimbursement, promising insurers could earn more if losses fall and results improve over time.
Subsidy clearinghouse One of the key mechanisms within the new assigned risk plan will be the so-called subsidy clearinghouse, which will give insurers credits for insuring certain risks whose rates are subsidized. Bowler hopes this will help some of the good agents who were penalized under the old system and encourage insurers to focus on attracting experienced good drivers regardless of where they reside.
The new system phases out the $300 million high risk pool deficit that insurers now pay based on market share. In the future, each insurer will be responsible for its own high risk losses so there will be no pooling. Until that day comes in 2008, however, about two-thirds of the deficit will still be shared according to market share of companies as of June 30, 2004.
The new system also establishes uniform claim handling practices and performance standards based on nationally accepted standards.
Initial reaction Initial industry reaction to the 160-page decision was mostly favorable, with agents and a coalition of 16 of the state’s 19 insurers praising the decision.
“We are generally very favorably impressed,” said James Harrington, executive director for the insurers’ coalition.
“It accomplishes our main goals,” said Frank Mancini, president and chief executive officer, Massachusetts Association of Insurance Agents (MAIA). Those goals include ending the “gaming” of the system, encouraging the appointment of more voluntary agents, and more equitably distributing the costs of the residual market.
Mancini said he anticipates that carriers will take a fresh look at some of the agents without voluntary market contracts who also have good loss ratios and consider signing them.