Industry, Consumer Interests Square-Off Over Mass. Auto High Risk Plan Changes


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A parade of industry representatives urged Massachusetts Insurance Commissioner Julianne Bowler to approve rules to transform the state’s auto insurance high risk plan into an assigned risk model, but consumer groups and the state’s leading insurer warned her against making the changes at a pubic hearing yesterday.

The hearing included testimony in support of the changes as a step in the right direction from two insurers, State Farm and Progressive, that do not currently write much or any auto insurance in the state but are of the type Gov. Mitt Romney would like to attract to the state where only 19 insurers now write private passenger auto policies.

The rule changes under consideration would over a three-year period change the state’s current high risk organization, Commonwealth Auto Reinsurers, from a unique reinsurance arrangement under which high risk producers are assigned to carriers to a plan where individual high risk policies are assigned to companies in a rotating fashion in a new Massachusetts Assigned Insurance Plan (MAIP).

In an April 29 directive, Commissioner Bowler ordered CAR to come up with reforms after insurers complained about and studies showed inequities in how the current system allocates high risk losses and appears to foster fraud. She now faces the task of approving or disapproving the specific set of rules adopted by CAR’s governing committee.

A spokesman for Bowler said that she would likely have a decision in August.

Critics of the current reinsurance system, including a coalition of 16 insurers and the state’s agents’ association, say it unfairly distributes the costs and losses of the residual market among insurers and has become the single biggest reason for insurers’ pulling out of the state.

But critics of the switch to the MAIP maintain the reforms go too far and may violate state consumer laws. They argue that there are other ways to resolve the inequities in the existing CAR plan without resorting to an assigned risk type plan similar to one the state replaced more than 30 years ago.

“The proposed rules violate laws enacted by our Legislature, conflict with the public policy reflected in those laws, and fail to satisfy the basic requirements you set forth in your April 29th letter because the rules would cause significant market disruption and adversely impact consumers, especially those residing in urban areas,” testified Arthur J. Remillard, Jr., chief executive officer of Commerce Insurance Co., the state’s largest auto insurer. Remillard also serves as chairman of CAR’s governing committee and voted against the rules, which passed the rest of the CAR committee in an 11-2 vote last month.

Remillard claimed the changes would hurt urban drivers by depriving more than one million drivers the “right to choose” their own insurer and the loss of credits and discounts. They would also harm consumers indirectly by creating a “second class” of high risk agencies in urban areas subject to more stringent claims and underwriting than other agencies in non-urban areas, Remillard maintained.

He urged Bowler to reject the rule changes and pursue a strategy similar to that observed in South Carolina by working with the Legislature to make statutory changes first.

Failure to make statutory changes could place insurers in a risky position, another Commerce executive, James A. Ermilio, senior vice president and general counsel, warned.

“To insist that carriers operate in accordance with those proposed rules could subject the carriers to class action lawsuits brought on behalf of agents and consumers and whose statutory rights and protections would be violated,” Ermilio contended. He cited the state’s “take all comers” law as one statutory obstacle to the rules and warned about potential explosive growth in the residual market as a result of the changes.

But the bulk of insurers and agents, under the umbrella of the Coalition for Auto Insurance Reform, dismissed the Commerce argument and maintained the changes would fit within current statutory framework.

Frank Mancini, president of the 1,700-member Massachusetts Association of Insurance Agents, urged approval of the new rules. “Their adoption will represent an important step in achieving stability in the Massachusetts private passenger auto insurance market. Such stability will forestall the potential of a market ‘crisis’ and provide consumers with more choices in their insurance decisions.”

Mancini said that over the past few months while CAR has been developing the reforms, hundreds of agents without voluntary auto company contracts have been contacted by companies regarding possible appointments as voluntary agents. “This is a positive development that should be embraced by all seeking a healthier marketplace,” he commented, adding that the changes will lead to more, not less, consumer choice.

Attorney General Tom Reilly has supported Bowler’s efforts to change the rules. At yesterday’s hearing, Glenn Kaplan, assistant attorney general, urged Bowler to approve the new rules with certain changes to guard against good drivers with clean records being placed in the residual market and to limit market disruption during the transition from one plan to another.

Peter Robertson, of the Property Casualty Insurers Association of America, argued contrary to those who say the changes would violate state law. Instead, Robertson argued that the changes are in fact necessary to bring the system in line with current law.

Robertson said current state law requires that all eligible drivers be guaranteed coverage through the residual market if they cannot obtain it in the voluntary market; that premiums for these risks not exceed those charged in the voluntary market; and that the costs and burdens of the residual market “must be distributed fairly and equitably” among insurers.

Robertson said that the new rules make the distribution formula more equitable without affecting the other mandates in the law. “All eligible drivers will still be guaranteed coverage and the premium charges for that coverage will be the same for such drivers as they would be in the voluntary market,” the PCI representative told Bowler.

Consumer groups expressed concern, however, that eventually insurers will seek to charge risks in the assigned risk plan higher rates than those charged in the voluntary market.

“That’s where they are headed with this,” commented opponent Steve D’Amato of the Center for Insurance Research. D’Amato predicted consumers would revolt against the changes once the effects become known, adding that “Massachusetts is not South Carolina.”

Testimony of State Farm was in line with D’Amato’s assumption that the rates charged drivers in the high risk plan will probably face scrutiny, a change that most agree would require legislation. State Farm counsel David R. Tideman said that MAIP rates should be different from voluntary market rates and that any rate subsidies should be clearly identified to policyholders. He also said insurers should be free to use their own underwriting standards, acknowledging that this principle is “incompatible” with the state’s “take all comers” requirement.


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