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Testimony in Opposition to Governor Romney's Proposed Automobile Insurance Reform Legislation, HB 4128
Chairmen Andrea Nuciforo and Ronald Mariano, and members of the Joint Committee on Financial Services
There’s no question that Massachusetts’s heavily regulated auto insurance system has problems. But our strict regulations are not the cause of its worst feature, the ultra-high premiums drivers pay. The blame for that belongs to Massachusetts’s ultra-high accident rate. Massachusetts has the dubious distinction of having the highest accident rate in the country by far – an astounding 40% higher than the state with the second-highest rate, Rhode Island. Even improving our worst-in-the-nation accident rate to second worst could drop our premiums by nearly 30%, or about $300 on average per car, producing over $1 billion in statewide savings.
Governor Romney’s plan does nothing to protect consumers, reduce car accidents, or otherwise address the underlying reasons for high insurance rates.
1. Governor Romney’s legislation removes emphasis on good/accident free drivers and allows insurers to use unfair rating criteria to determine what is a “good driver”.
The Governor’s legislation would not produce fair rates for good drivers. Under the current Safe Driver Insurance Plan (“SDIP”) system, the determination of who is a good driver is based solely on driving experience. The Governor’s legislation eliminates the SDIP system. In lieu of that system, companies will be able to charge rates based on criteria such as homeownership, marital status, age, sex, education, employment, credit scores, amount of insurance purchased, and other rating criteria that are currently used in other states but are not used under the SDIP system. While companies cannot refuse to provide insurance based on factors such as age, sex or marital status, these factors will be used in setting rates. Therefore, many drivers who are now Step 9 drivers (best drivers), will lose that preferential status due to the application of these other rating factors.
2. Governor Romney’s Plan won’t result in real rate reduction
The Governor wants to deregulate auto insurance rates, which he argues will lower our premiums. Let insurers undercut each other on prices, he suggests, and the consumers will benefit. We’ve heard that one before; just check your electricity bill. And the fact is that insurers are already allowed to undercut one another on prices under the existing system – but they also can’t charge more than the state-set ceiling on rates, a unique safeguard that Romney would eliminate.
If the Governor were serious about fostering downward rate competition, he would have mandated that his Insurance Commissioner pursue that goal years ago, by streamlining approval of competitive pricing proposals, by publicizing the lower rates already offered by some companies, and by making it easier for consumers to switch to lower-cost insurers.
And if Governor Romney really wanted to lower our premiums substantially, he’d have pushed his Insurance Commissioner and the state Legislature to promote safety and cost containment programs that would reduce our high costs and ludicrous accident rate.
The only effective way to reduce premiums is to lower the underlying costs. State Senator Susan Tucker of Andover, has filed legislation to develop a comprehensive plan to reduce accidents by redesigning our most dangerous intersections and roadways, improving driver training and behavior, and enhancing traffic enforcement. Even improving our worst-in-the-nation accident rate to second worst could drop our premiums by nearly 30%, or about $300 on average per car, producing over $1 billion in statewide savings.
3. Governor Romney’s legislation does not guaranty lower rates
Under the Governor’s legislation, after a 4 year transition period from the current system where the Insurance Commissioner sets the rates, to a competitive system, where companies will set the rates, the only limit on how high companies can set rates is a requirement that no vehicle’s rate for liability coverages (which represents about 60% of the total premium) may increase more than 15% in any 12 month period, unless there have been changed circumstances, including, but not limited to, coverages or coverage options purchased, driving record, years of driving experience, vehicles insured, the garaging location of the vehicle, or the company insuring the vehicle. This 15% limit will also apply during the 4 year transition period in addition to other limitations that expire at the end of the transition period. The “including but not limited to” language indicates that changes in other rating factors mentioned above, such as marital status, homeownership and credit, could be used to justify an increase greater than 15% per year.
4. Governor Romney’s legislation would likely result in higher rates in 2006 than the Commissioner would have set under the current system
Under the 4 year transition period, the Commissioner will set a base rate for 2006. This rate will apply to drivers insured through the residual market during 2006 and 2007 and to drivers whose companies have not filed their own rates. The bodily injury and personal injury protection portion of the base rate (which represent approximately 40% of the 2005 premium) must remain the same as in 2005; however, the remaining coverages may increase or decrease to the extent the Commissioner determines is appropriate. If the Commissioner were instead to set the 2006 rates under the current system, it is likely that premiums for bodily injury and personal injury protection coverages would decrease significantly, but that property damage liability and collision coverages would be increased. Therefore, under the Governor’s legislation, the base rate set by the Commissioner for 2006 would likely be higher than the rate she would set under the current system.
5. Under Governor Romney’s legislation, many individual drivers will experience dramatic rate increases during the 4 year transition and even more so in future years.
While the Commissioner will set a base rate for 2006, individual companies will be able to use their own rates for that year, but companies’ average rates cannot be 5% higher or lower than the Commissioner’s base rate. In 2007, companies can change their average rate to 6% higher or lower than their 2006 rates. In 2008 and 2009, those percentage changes are 7% and 10%, respectively. In 2010, the transition will be over and these limits will no longer apply. It is important to consider that these percentage limits – known in the industry as “flex bands” – apply to average rates and not individual rates; therefore some individuals could see their rates change much more dramatically, subject only to the 15% cap described above on annual increases for liability coverages.
6. The increase in rates for urban drivers will be compounded beginning in 2010.
In setting their own rates, insurers must use the territory definitions prescribed by the Commissioner for policies effective in 2006 through 2008. During 2009, insurers may vary rates by town, but may not geographically base rates that further divide towns by zip code or other means. Beginning in 2010, there is no cap on territorial relativities other than that imposed indirectly by the percentage limitations described above. Therefore, companies will be able to set rates that vary dramatically from town to town, zip code to zip code, neighborhood to neighborhood and even street to street. This is likely to have a significant adverse impact on urban drivers.
7. Drivers insured through the residual market will no longer be able to choose their insurance companies and will likely pay higher rates than they would under the current residual market system.
Under the current system, all drivers, including drivers who are insured through the residual market, can choose their own insurance companies. However, under the Governor’s legislation, which authorizes an assigned risk plan in lieu of the current residual market system, drivers insured through the residual market are not able to choose their own insurance companies. In Massachusetts, this would include a significant percentage of drivers, including a disproportionate number of urban drivers.
Under the Governor’s legislation, for 2006 and 2007, companies would charge assigned risks a rate determined by the Insurance Commissioner. However, beginning in 2008, companies would charge assigned risks a rate set by the assigned risk plan (which is controlled by insurance companies and insurance agents). This rate, known in the industry as a so-called “dirty rate,” would be filed by the assigned risk plan, and most likely would be a higher rate than is applicable for drivers who are not insured through the plan.
Massachusetts consumers deserve real insurance reform: reform that serves our needs and our pocketbooks. Governor Romney’s proposal seems driven by its appeal to big insurance companies – many -out-of-state. Consumers don’t care how this plays in corporate boardrooms elsewhere. We can make real reform here in Massachusetts using common sense and putting consumers first.
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