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Confusion Reigns on the Massachusetts Auto Front

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While everyone agrees that something should be done about Massachusetts’ spiraling auto rates and uncompetitive market, no one seems to be able to agree on just what. When the state’s Department of Insurance (DOI) Commissioner Julianne M. Bowler granted a 2.5 percent increase in premium rates last Dec. 15, she effectively countenanced a rise that would make Massachusetts the third most expensive state in the nation (after New York and New Jersey). Premiums for 2004 are expected to average $1047, up from $936 in 2001.

The reaction from the National Association of Independent Insurers (now the PCI) came quickly, with letters from its General Counsel Gerald Zimmerman to the Editors of the Wall Street Journal and the Republican, decrying the DOI’s failure to take any concrete measures to increase competition. He also lamented the lack of movement towards reform of the state’s Commonwealth Auto Reinsurers (CAR) scheme for distributing losses from high-risk drivers among insurers.

A somewhat delayed reaction came soon after the holiday season. First, the Massachusetts Motorcycle Association filed suit against the DOI and the Auto Insurers Bureau (AIB) in the state’s highest court, claiming the commissioner’s rate decision was unfair and discriminatory. Then Mass. Attorney General Tom Reilly weighed in, appealing Bowler’s decision to the State Supreme Court, arguing that a 2.5 percent increase in the cost of automobile insurance is unwarranted and will result in close to $100 million in additional costs for the state’s drivers.

The bikers also want their money back. The suit claims insurers have collected more than $100 million in excessive profits from motorcycle premiums in the past three years and asks the Supreme Court to review the matter. “For two years at public rate hearings we’ve brought these issues of coverage not available to motorcycle consumers to the commissioner and the Auto Insurers Bureau (AIB),” stated Betsy Lister of Medford, a member of the MMA’s board of directors, and the owner of a Medford insurance agency. “And for two years we’ve been put off,” she added.

Paul W. Cote of Amesbury, the MMA’s legislative director, said his organization felt compelled to file the suits because the “Commissioner and State Rating Bureau rely upon the historical claims and expense data provided by the AIB on behalf of the insurers.” However, “Our review of the motorcycle historic loss data, which is buried with the auto stats, shows insurers are making in excess of a 300 percent profit on the motorcycle line of business in Massachusetts. That’s unconscionable, and we want it back!” He claimed that neither the insurance department nor the AIB have disputed the figures, but have procrastinated in making any changes or giving the bikers any relief.

Cote questioned Bowler’s decision to give the AIB until June 1, 2004, to come up with another rating system for motorcycles, with an expected implementation for January 2005. “Why should the 144,000 ‘citizen-bikers’ in this state wait another year, paying purely grossly excessive premiums with limited coverage?” he asked. In addition to “retroactive relief,” the suit also asks the court for an order implementing “optional coverage” as soon as possible.

Reilly’s appeal argues that the DOI wrongly imposed the 2.5 percent increase, because it used flawed methodology and erroneous calculations in fixing and establishing the rates. The complaint alleges that the DOI did not have a reasonable basis to adopt a new underwriting profit model that leaves consumers paying about $80 million more than the method that had been in place for the previous 20 years.

“For the second consecutive year, the DOI has, without justification, ruled in favor of an increase in auto insurance rates that will hurt Massachusetts drivers,” Reilly stated. “Massachusetts consumers should not have to pay more as a result of unfair and unsubstantiated methodologies favored by the auto insurance industry.”

Reilly, however, has enough experience as a politician to hedge his bets. In the same announcement he stated that the “DOI’s recent ruling emphasizes the need to reform the state’s auto insurance system,” and indicated that “consumers will be far better served by a market fueled by competition. Without it, they will continue to overpay for auto insurance.” While raising (or not raising) premiums isn’t necessarily inconsistent with reforming the insurance code, at the very least it’s a distraction for all concerned.

Reilly’s decision brought an immediate and pointed response from the NAII’s Zimmerman, who called it “an example of how politics overshadows common sense in the Bay State. This move highlights the fact that the rate-setting process in Massachusetts is driven by politics rather than market realities,” he continued. “This type of political grandstanding certainly does not lead to insurers considering Massachusetts as a market to sell insurance and ultimately that lack of competition hurts policyholders.”

Although he agreed with Reilly’s statement about the need for increased competition, he observed that it “certainly does not help head the state toward a competitive market for this already unnecessarily lengthy and adversarial rate-setting process to be dragged out even longer by this unnecessary, and we believe baseless, appeal.”

Zimmerman called the move a “prime example of over-regulation and micromanagement” at a time when insurance fraud is costing Massachusetts insurers and consumers millions. He blamed the appeal for blocking discounts, stating: “When Massachusetts drivers open their renewal notices, they can thank Attorney General Reilly in part for the fact those discounts aren’t there, or are smaller than they otherwise would be.”

Pointing to New Jersey as an example of how a state can turn around a bad market situation by aggressively addressing the issues of fraud and rate setting, Zimmerman indicated that, although the state had long been known as the country’s worst auto insurance nightmare, “recent legislative reform is resulting in a return of insurers to the state and voluntary rate reductions.”

“Stimulating competition, not stifling it, is the best way to fix a failing insurance market,” he continued. “We believe the first step in fixing the badly broken Massachusetts market and heading toward competition is to completely revamp the irrational and unfair residual market mechanism.”

This is only chapter two in what promises to be a yearlong struggle. The initial decision that Massachusetts’ lawmakers, regulators, insurers and agents have to make is whether to work within the existing structure, or to reform it along the lines taken in New Jersey. Settle that question and the other ones become easier; eventually insurance may become less expensive for the state’s car owners-and bikers.


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