After years of industry complaints and months of wrangling among regulators, carriers, voluntary agents, involuntary agents, consumers and lawmakers, Massachusetts has overhauled its system of insuring high risk drivers.
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’s residual auto insurance market.
The result is that the Massachusetts Assigned Insurance Plan (MAIP) will be implemented as an assigned risk system as of January 1, 2008, following a three-year transition period.
Bowler’s decision marks the biggest reform in private passenger auto insurance in the state in more than a decade. The current reinsurance facility mechanism has been criticized for unfairly penalizing some auto insurers over others, for forcing a number of carriers to leave the state, and for discouraging the entry of new capital.
Following two public hearings and months of review of Commonwealth Automobile Reinsurers’ (CAR) proposals, Bowler notified CAR that she approved its changes but with certain modifications.
“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.”
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 designed to minimize disruptions to consumers during the transition to the new system and avoid penalizing good drivers no matter where they reside.
Among Bowler’s modifications is one hiking the market share threshold at which an insurer becomes a servicing carrier. She said she hoped 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 expense reimbursement, promising insurers could earn more if losses fall and results improve over time.
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. In effect, this system will allow insurers to collect the correct premium for each insured vehicle in the MAIP without affecting the premium charged to a policyholder. Bowler said she 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.
From a consumer perspective, Bowler moved to protect drivers with good driving records and those with group discounts who critics feared might be harmed by the new MAIP.
She approved a new so-called “Clean in Three” provision which prevents insurers from assigning any policyholder to the MAIP if they are experienced drivers (licensed 3+ years) who have not had at-fault accidents or moving violations within their most recent three years of driving experience and who have had no convictions for drunk driving or vehicular felonies within 5 years.
Also, Bowler ordered that policyholders who are members of group marketing plans retain their discounts and cannot be assigned to the MAIP.
She also strictly limited the risks that may be placed in the assigned risk plan during the transition period between January 2006 and January 2007. For these years, insurers may assign only policyholders who are relocating to Massachusetts without proof of previous driving history or who have obtained a license for the first time to the MAIP.
During 2005, ceding of policyholders to the current high-risk pool will continue as currently done.
The move to MAIP by regulatory order is an improvment but not a panacea for the state’s auto insurance system, according to Bowler, who has stressed that a special task force is looking into what statutory changes might also be needed.