Tetstimony on Private Passenger Motor Vehicle Insurance Rates

By Deirdre Cummings
Legislative Director

Proposed New Regulation 211 CMR 79.00, Private Passenger Motor Vehicle Insurance Rates; Docket No. G2007-07
Before Nonnie Burnes, Commissioner of Insurance

September 20, 2007
To: Nonnie Burnes, Commissioner of Insurance
RE: Proposed New Regulation 211 CMR 79.00, Private Passenger Motor Vehicle Insurance Rates; Docket No. G2007-07
FR: Deirdre Cummings, Legislative Director

Consumer Improvements to Proposed Auto Insurance Regulations

We all like competition when it works – but we’ve seen enough failures to know that without proper safeguards, businesses will seek to add to their bottom line at the expense of the public and the consumer (remember the current mortgage crisis, toxic toy recalls, ENRON, and student loan kickback scams, to name a few examples).

With proper rules, oversight and information our competitive market can serve the consumer. But, as we have seen all too often, powerful interests are working to undermine our safeguards.

Despite its flaws, our existing auto insurance system had some important consumer protections: 1) Rates are primarily based on our driving record - using just driving record, experience and territory as the factors in setting rates; 2) consumers are protected from being unfairly rejected/ turned down by insurance companies through CAR – or a reinsurance system; 3) rates are kept from being excessive or unaffordable in urban communities and for new drivers through rate flattening; 4) and finally, our current system has produced a whopping 21% decrease in rates over the last three years and would have cut rates roughly 10% more next year. That’s because accident and injury claims, which are the primary cause of our high rates, have finally begun to fall, and state regulation (until now) had passed savings from such reductions in claims directly on to all consumers.

Any new plan – competitive or not – must be measured against what consumer have today. Consumers should have a plan that preserves next year’s 10% rate decrease, protects our right to choose any insurer, and allows companies to compete for our business based only on our driving record.

But that is not what these proposed regulations will do.

I am submitting for the docket 12 consumer provisions that must be included in our new auto insurance regulations.  

I want to highlight the most important areas in the proposed regulations that must get addressed.

1. Rating and Underwriting Factors

For the first time in over 30 years, insurance companies will be allowed to use discriminatory factors in selling auto insurance. While banning some of the most obviously unfair factors, the proposed regulations permit insurers to use many other factors that could harm low-income and minority drivers, including factors that act as proxies for the very factors that are banned. In order to protect against discrimination and to ensure that driving record is the primary factor insurers use in setting premiums and in underwriting, it is necessary to list expressly all the rating and underwriting factors that may be used by insurers.

In addition, insurance scores and information gathered from consumers’ credit reports have only been temporarily prohibited for rating purposes and have not been restricted at all for use in denying coverage altogether.

By not limiting the factors that are allowed in setting rates or in allowing insurers to deny coverage altogether, you dilute the weight or importance of our driving record.

Consumer groups and leaders have all called on you and Governor to ban the use of all socioeconomic rating and underwriting factors by expressly “allowing” the factors that can be used. 

Letter from Mayor Menino, Sept. 10, 2007
Letter from 10 Consumer Groups, August 1, 2007
Letter from 3 members of the Governor’s Auto Insurance Task Force, July 19, 2007

2. Residual Market

Consumer groups have consistently opposed the “assigned risk plan” as proposed because it permits insurers to reject drivers they consider to be “undesirable” by using unfair criteria – like insurance scores or any other factors than the 12 factors prohibited.

Insurance industry estimates and past experience indicate that more than one million drivers – including hundreds of thousands with perfect driving records – will be branded “undesirable” and lose the ability to shop around for the lowest rates in the market. They’ll miss out on the competition right from the beginning.

Some of the one-in-four Massachusetts drivers deemed “undesirable” will be permitted to stay with their current insurer – only initially. But eventually, each of them will be randomly assigned to one of 19 insurance companies (with 19 different rates). And, as a result, these drivers could not only lose access to combined auto/homeowners discounts, but also be stuck with a company that offers higher rates, based on pure luck. Next-door neighbors with identical cars, insurance coverage, and driving records will be assigned different rates in the new auto insurance system – losing their ability to take advantage of the “competitive market place.”

For these reasons the Clean in 3 provision in the MAIP must be strengthened and made permanent. Underwriting factors must be expressly allowed and limited to primarily driving record. At the very minimum you must require insurers to file and disclose their underwriting factors.

3. Overall Rates

It is our belief that under this plan consumers will not see rates as low as what the current rate setting process delivered. As stated earlier, it is likely we would have seen another significant drop in rates this year. In testimony submitted to this office on June 15, 2007 regarding the competition hearing and citing the AIB “Massachusetts Private Passenger Automobile 12 Month Trend Indications” dated May 2007 : “…it is nearly certain, based on existing data, that if the Commissioner fixes and establishes the rates for 2008, the average rate decrease from current 2007 rate levels will exceed 8.5%.”

Any new plan must and should be measured against a likely rate decrease of 10% (assume industry number would be low). A full evaluation of rates must be done, by this office and an independent agency, while we go through this regulatory transition. In order to fully appreciate any impact the new regulations would have on rates, findings must be in comparison to what the rates would have been under the previous system.

Further, by not addressing our high-in-the-nation accident rate, this office has failed to adopt the most significant reforms to lower premiums. The new regulations should mandate a comprehensive plan to reduce our accident rate, which is the single largest factor driving our premiums. Without such a plan, consumers will fail to see any meaningful rate reductions in the long term.

4. Consumer Tools

The current regulations fall far short of empowering the consumer in the new competitive market place.

Rates and products should be standardized, uniformly disclosed, comparable and made accessible to the public on the Division of Insurance’s website. The Health Connector, is a great example of a tool that allows consumers to compare various health insurance products. While not exactly the right model, it shows how we can present a complicated product to consumers in a meaningful comparable way. This format will allow consumers to make informed choices and allow regulators to catch new unfair or discriminatory rating and underwriting factors.

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