Mass Auto Insurance Has Bumpy Past

Sunday, March 23, 2008

By Dan Ring

The Republican

Insurance Commissioner Nonnie S. Burnes said she picked up some important lessons from history before her bold move to start competitive car insurance for the state on April 1.

Thirty years ago, Massachusetts dropped its highly regulated form of auto insurance and introduced competition. It turned out to be a brief, failed experiment that drove up rates too high for urban motorists and left the state gun-shy for decades about making any similar changes.

Burnes, who was appointed commissioner in early 2007, said she was keenly aware of the turmoil that erupted after a sweeping law for competitive auto insurance took effect in 1977.

"That was terrible for the consumer, awful for the companies," said Burnes, a former 10-year superior court judge appointed commissioner by Gov. Deval L. Patrick.

Massachusetts has a long tumultuous history with auto insurance. The state approved the country's first compulsory car insurance and first regulated rates in 1926.

A public outcry over mandatory insurance and rising rates caused a crisis on Beacon Hill and prompted the resignation of the state's insurance commissioner in 1928.

Fifty years later, another major dispute erupted when the state made its initial attempt at competition in auto insurance.

Back then, companies were given little time to prepare. Actual rates were unavailable on Jan. 1, but policies were renewed anyway for consumers, taking away choice.

"You can imagine how consumers felt about that," Burnes said.

According to a history provided by the state Division of Insurance, rates skyrocketed in Boston and nearby urban areas.

Patrick B. Bresnahan, who started Bresnahan Insurance Agency in Holyoke in 1957, said urban youth were hit especially hard by the first effort at competition in auto insurance.

"It was chaos," Bresnahan said. "Kids were paying more for insurance than they were for their cars."

Legislators responded by passing a law to cap increases at 25 percent over 1976 levels and ordering insurers to send rebates to some auto owners.

Insurers filed lawsuits and the state's insurance commissioner abandoned the new competitive system and returned to setting rates for 1978.

In succeeding years, auto insurance companies fled the state.

Bresnahan, 73, said he watched companies desert the state during the 1980s and 1990s. "They just could not make a profit here," he said.

In 1977, there were 111 auto insurers doing business in the state. By 1990, that number dwindled to 53 and it stands at 20 today, although that number is expected to grow as other companies come back to the state.

Several insurers paid the state huge exit fees to be released early from their legal obligations. It made more financial sense to pay the fees instead of remaining in the state and continuing to lose money.

Peter T. Robertson, lawyer in Massachusetts for the Property Casualty Insurers Association of America, said insurers were discouraged by the state's method for covering high-risk drivers.

Insurers are allowed to place those drivers in a pool where their accident costs are shared by all insurers and then passed on to all drivers annually.

Burnes is gradually moving to a system of randomly assigning those drivers to an insurer. The amount of assignments to any company would hinge on a company's market share.

Under "assigned risk," insurers will be more responsible for the accident costs of its riskier drivers, giving insurers an incentive to more closely examine claims and reduce fraud.

Robertson said assigned risk is also a fairer way to allocate such drivers.

When Burnes announced her intentions to start managed competition in July of last year, she said the state should no longer be held hostage by the 1977 experience.

She used a state law to administratively phase in managed competition.

She opted to begin the new system on April 1 when 314,000 policies renew.

A total of 540,000 policies renewed on Jan. 1, but are based on last year's rates.

In order to avoid mistakes of the state's past attempt at competitive rating, Burnes capped rate increases at 10 percent for the state's worst drivers. Insurers can set their own rates but only with strict state oversight.

Burnes also retained vestiges of the old system where regulators set all auto insurance rates.

For example, she kept a system of "rating territories" that allows for suburban communities to subsidize rates of urban centers to slightly cut insurance costs in cities where accident rates are higher. Experienced drivers are also paying somewhat higher premiums to keep down the insurance costs of younger motorists.

Burnes is also continuing to ban the use of credit scores and certain socioeconomic factors in determining auto insurance rates.

"I'm going to retain a lot of control to make sure it is rolled out in a smooth way and is beneficial to the consumer," Burnes said.

Insurance costs will still hinge on a person's driving record, type of car and coverage selections.

Other aspects of the state's auto insurance system are sealed in state law and can't be changed administratively, Burnes said.

Under state law, for example, motorists must have only $2,000 in medical bills before they can sue the driver who caused the crash.

Former Gov. W. Mitt Romney sought unsuccessfully to raise that threshold to $4,000 to limit personal injury lawsuits and wring costs out of the system.

Romney also wanted to save money by limiting windshield replacements. He sought to create a $100 deductible that would have been waived for a more economical repair of a windshield. Right now, there is no deductible on windshield replacements.

Future historians may tell us the fate of those and other proposed reforms.