TESTIMONY On Automobile Reinsurers Rules

By Deirdre Cummings
Legislative Director

Hearing on Emergency Commonwealth Automobile Reinsurers Rules
Testimony Before Health Care Finance
Docket Number C2008-01

Good afternoon.  My name is Stephen D’Amato, and I am a consultant to the Center for Insurance Research, a consumer research and advocacy non-profit organization.  I worked at the Division of Insurance for 12 years, including seven years as the Director of the State Rating Bureau.  I am here today to offer the joint testimony of the Center and MASSPIRG relating to Docket Number C2008-01, the Hearing on Emergency Commonwealth Automobile Reinsurers Rules – Amendments to CAR Rules 21-24 and 26-38.

The Center and MASSPIRG stand by all of their previous criticisms of the rules governing the residual market and today identify three new issues raised by the emergency rules promulgated on February 6, 2008.  First, the emergency rules deal illegally and unfairly with the situation in which an insurer – typically a smaller one – contracts with a second insurer to handle the residual market customers of the first insurer.  Under the Division’s emergency rules, these customers are charged the rates of the second insurer.  This allows a smaller insurer to game the system and charge higher rates to its residual market customers simply by contracting with a second insurer that has higher rates.  Not only does this violate the Lane-Bolling amendment (G.L. c. 175, s. 113H[D]), but this is also clearly unfair to the residual market customers receiving the higher rates, as well as to the larger insurers, which are not generally permitted to enter into these kinds of contracts under the rules.  I would note that this issue was handled fairly in the original rules presented to the Division by Commonwealth Automobile Reinsurers, but the Division rejected those rules and replaced them with emergency rules producing the opposite result.

The second problem with the new rules is the loophole, mentioned by others here today, that allows new entrants in the market to avoid participation in the Massachusetts Automobile Insurance Plan for a period of up to three years.  Massachusetts, unfortunately, has a reputation for creating financial benefits to new entrants at the expense of other insurers.  New entrants should be on a level playing field with all other insurers.  Otherwise, the Division of Insurance will be sending the message that insurers are not treated equally in Massachusetts.

The third problem with the new rules is the lack of clarity on the issue of whether an insurer can refuse coverage to a driver during the transition period.  For the past month, the Division’s own website has stated, with respect to the transition period:

During this time, a driver can only be refused coverage if he\she:

  • Has 10 or more surcharge points,  
  • Is a newly licensed driver seeking his\her own policy, or
  • Has not had a Massachusetts automobile policy during the last 12 months

When the Center and MASSPIRG pointed out that USAA and State Farm were not following these rules, it is my understanding that several members of the press were informed that the website was inaccurate.  Moreover, on March 30, the Lowell Sun reported the following:

“In the voluntary market, insurers can decline to write people so long [as] it isn’t for one of the forbidden reasons,” Burnes said, referring to age, race and other social factors.

Insurance companies cannot refuse to renew someone’s policy if that driver’s record and car have not changed from the year before.

It is our view that the Division should support the rule set forth on its website; but if the website misrepresents the Division’s position, the Division should immediately clarify when consumers may be refused coverage by an insurer.


Stephen D'Amato is a consultant with the Center for Insurance Research in Cambridge, MA



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