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Under the new “managed competition” auto insurance rating system in Massachusetts, many good drivers will receive rate increases and many bad drivers will receive large rate decreases, based on factors having nothing to do with their driving records, according to a new report entitled ‘How You Drive’ Takes A Backseat to ‘Who You Are’: (Mis)Managed Competition in the New Massachusetts Automobile Insurance Market,released by two consumer groups – the Center for Insurance Research and MASSPIRG.
Starting in April, factors relating to “who you are” – income, marital status, homeownership, education, age, race, and other factors supposedly prohibited by the Division of Insurance for use in setting rates – will take center stage in the Massachusetts auto insurance market.
“It’s time for everyone to stop pretending that the new system emphasizes driving record and ignores a driver’s socio-economic status – precisely the opposite is true,” said Stephen D’Amato, lead author of the report. “In fact, if a terrible driver is a married, middle-aged homeowner, the new system most likely gives that person a huge break. On the other hand, many unmarried renters with spotless driving records will actually receive a rate increase under the new system.”
Consumer advocates maintain that driving record is not only the single most accurate indicator of risk, it is also the fairest and least discriminatory factor that can be used in setting individual rates. Commissioner Nonnie Burnes claimed allegiance to this principle when announcing her decision to move to “managed competition.”
The report shows, however, that driving record is no longer the primary rating factor in Massachusetts. As a result, in all parts of the Bay State, drivers with bad driving records who score well on the “who you are” scale – homeowners, college students, married couples – can receive huge rate decreases. Even more problematic is that these rate decreases are paid for by drivers with perfect records who score poorly on that scale.
The report also shows that in all rating territories, many drivers with clean records will fail to receive the rate reductions promised by the Commissioner of Insurance to “drivers with good driving records no matter where such drivers garage their vehicles.”
“As predicted by consumer groups, the new insurance system will lead to higher rates overall than the old system would have produced, and to a slew of unfair pricing practices,” said Deirdre Cummings, Legislative Director of MASSPIRG and a contributor to the report.
The average rate decrease is estimated to be 7.1% under the new rating system; however, the overall average rates would likely have been reduced by at least 11% under a fair competitive rating system, or under our previous rating system. That 4% shortfall amounts to a transfer of about $150 million from consumers to insurers.
Specifically, the report uses the rates filed by the five largest insurance companies in the state and approved by the Division of Insurance to show that a sample driver with a perfect driving record receives, averaging the five companies’ rates, a rate increase of 5.2%, while a sample terrible driver in the same neighborhood enjoys an average rate decrease of almost 14%.
Perfect Younger Driver (A): Experienced Driver Class; 27-year-old single driver insuring one car; 8 years of driving experience with perfectly clean record; the driver is new business for the insurer; and the driver has no homeowners’ insurance policy.
Terrible Older Drivers (B): Experienced Driver Class; 57-year-old married couple insuring two cars; each driver has 38 years of driving experience and each has had a major atâ€‘fault accident every three years of his or her driving history (which means that over the past six years alone the couple caused four major accidents); insured with the same company for the last 11 years; and the couple has a homeowners’ insurance policy with the insurer.
Even when age is removed from the example, the results are still plainly unfair. If all three drivers in the above example were 35 years old, the following result would occur:
The perfect driver would see, on average, a rate increase of 0.9%, while the terrible drivers in the same neighborhood would enjoy, on average, a rate decrease of 9.0%.
Perfect Driver (C): Experienced Driver Class; 35-year-old single driver insuring one car; 16 years of driving experience, perfectly clean record; driver is new business for the insurer; and the driver has no homeowners’ insurance policy.
Terrible Drivers (D): Experienced Driver Class; 35-year-old married couple insuring two cars; each driver has 16 years of driving experience and each has had a major at-fault accident every three years of his or her driving history (which means that over the past six years alone the couple caused four major accidents); insured with the same company for the last 11 years; and the couple has a homeowners’ insurance policy with the insurer.
All policies in the above examples are rated for the Compulsory Package for Territory 12 (Medford, Quincy, Salem, Saugus, Somerville, and Stoughton). The amount of premiums paid in other territories would be different, but the rate changes would be the same, with minor differences due to rounding.
Attached to this release is the Preface and Summary of Key Findings from the report. The full report is posted at www.masspirg.org/report
SUMMARY OF KEY FINDINGS – ‘How You Drive’ Takes a Backseat to ‘Who You Are’
- Under the new “managed competition” rating system, “who you are” has become more important than “how you drive.” Starting in April, factors relating to “who you are” – income, marital status, homeownership, education, age, race, and other factors supposedly prohibited for use by the Division of Insurance – will take center stage in the Massachusetts auto insurance market. Driving record is no longer the primary rating factor and is now a diluted factor. As a result, consumers with perfect driving records who have the least resources in our society will pay more to fund discounts to wealthy motorists, including those with terrible records. [pp. 1-32]
- The vast majority of new discounts and rating factors proposed by insurers and approved by the Division of Insurance are substitutes (or “proxies”) for factors specifically prohibited by Massachusetts law and are not based on the consumer’s driving record. These include discounts for having a homeowners’ insurance policy, Good Student discounts, Multiâ€‘Car discounts, Years Licensed discounts, Hybrid Vehicle discounts, and Loyalty discounts. [pp. 13-21]
- The 7.8% overall average rate reduction announced by the Division should be revised to 7.1% because the largest writer of auto insurance in Massachusetts changed its proposed rate decrease from 8.1% to 6.1%. It is important to note that even the 7.1% figure may be inflated since it is based on each insurer’s estimate of its own proposed rate change. The Attorney General was denied access to the information necessary to confirm the insurers’ estimates, and consequently, the true overall average rate decrease could well be smaller than 7.1%. Overall average rates would likely have been reduced by at least 11% under a fair competitive system, as well as under our previous rating system. The 4% difference in overall rates amounts to a transfer of about $150 million from consumers to insurers. [pp. 9-10]
- If you’re not receiving a particular discount, you’re paying for it. Unlike the previous rating system, the new system allows insurers to fund a discriminatory discount by charging more to those drivers not receiving the discount. [pp. 23-24]
- While the Division of Insurance has banned the use of credit scoring as a rating factor, the Division allowed insurers a backdoor way to use credit scoring in rating. Since the Division currently permits insurers to use credit scoring in deciding to whom they offer homeowners’ insurance policies, the insurers can use credit scoring to deny a motorist access to a homeowners’ insurance policy, thereby denying access to an auto insurance discount for having a companion homeowners’ policy. This is an apparently permissible way to get around the prohibition on the use of credit scoring in auto insurance rating. [p. 15]
6. Massachusetts consumers were promised that the new rating system would reward drivers with good records, penalize drivers with bad records, and prohibit insurers from using socio-economic and other discriminatory factors. Had this all been true, Massachusetts would have a rating system that would be the envy of the nation. Unfortunately, none of this was true. [pp. 1-32]
- In all parts of Massachusetts, drivers with bad driving records who score well on the “who you are” scale – homeowners, college students, married couples – can receive huge rate decreases that are funded by drivers with perfect records who score poorly on that scale. [pp. 11, 25-29]
- In all rating territories, many drivers with clean records will fail to receive the rate reductions promised by the Commissioner to “drivers with good driving records no matter where such drivers garage their vehicles.” [pp. 11, 25-29]
- The defects in the new rating system cannot be cured simply by urging consumers to “shop around.” The range of options available to many good drivers is much worse than the range available to many bad drivers. No amount of shopping around can change that. [pp. 30-31]
- The ideal competitive rating system would have merged the best aspects of the previous system with the best aspects of a competitive market. It would have required insurers to compete based on driving record and would have produced an overall average rate reduction of at least 11%. All drivers with good records would have seen large rate decreases. By shopping around, decreases well in excess of 11% would likely have been available to these good drivers, regardless of socio-economic and other prohibited factors. [pp. 30-31]
A 27-year-old single woman in Medford has been a licensed driver for eight years and has a spotless driving record. She rents an apartment from the 57-year-old married couple living upstairs. Each of the spouses is a terrible driver and has had a major atâ€‘fault accident every three years of his or her 38-year driving history, which means that over the past six years alone the couple caused four major accidents. But the single woman is not eligible for any of the new discounts the Commissioner of Insurance approved for the insurers under the new “managed competition” auto insurance system scheduled to start April 1, 2008. All she has going for her is her perfect driving record. The couple, on the other hand, owns two cars, has been with the same insurer for 11 years, and also has a homeowners’ insurance policy with that insurer. What kind of rates would the top five writers of auto insurance in Massachusetts charge to the woman and to the couple under the new rating system?
The chart below shows the rate changes for the Compulsory Package for auto insurance in Massachusetts:
[Source: Calculated from the approved rate filings of Commerce, Safety, Arbella Mutual, Liberty Mutual, and Metropolitan. Unless otherwise indicated, these filings are the source for all data and information relating to these insurers.]
The differential treatment of the perfect younger driver and the terrible older drivers is striking. On average, Perfect Younger Driver (A) would receive a 5.2% rate increase and Terrible Older Drivers (B) would receive a 13.9% decrease, which produces an average differential treatment of about 19%. Part, but only part, of the reason for the difference is that, contrary to statute and to its own regulations, the Division of Insurance is, in effect, allowing insurers to rate drivers based on age by using “years licensed” as a rating factor.
Even removing age from the example, however, still produces results that are plainly unfair. If all three drivers in the above example were 35 years old, the following result would occur:
In this case, the differential treatment is about 10% on average, with Perfect Driver (C) receiving a 0.9% average increase and Terrible Drivers (D) receiving a 9.0% average decrease.
Both examples illustrate that under the new “managed competition” auto insurance rating system, “how you drive” has become less important than “who you are.” This report will investigate the reasons why the rate changes for Terrible Drivers (B) and (D) can be so much better than those for Perfect Drivers (A) and (C), and what these obviously unfair results mean for the motorists of Massachusetts.
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