Auto Insurers Rip Rules on High-Risk Drivers

3-year break for newcomers writing polices called unfair

By Jeffrey Krasner, Globe Staff April 17, 2008

Many of the state's auto insurers say competition rules that took effect April 1 give an unfair advantage to companies just entering the Massachusetts market.

Under the state's revamped auto insurance system, insurance companies new to Massachusetts do not have to take on its riskiest and least desirable drivers for about three years. That could give them a financial boost compared with insurers already established in Massachusetts, which will automatically be assigned high-risk drivers based on their market share.

"Those that are in the market are seeking equity and fairness and those that are just entering the market are seeking any advantage they can get," said James T. Harrington, executive director of the Massachusetts Insurance Federation, an industry group that supported the new system, called managed competition.

Progressive Corp. of Ohio, the only insurance company that so far has firm plans to enter the Massachusetts auto market, said it supports the rules exempting it from having to insure high-risk drivers.

"The plan as written is fair, equitable, and consistent with plans in other states," said Emily A. Vlasich, corporate counsel for Progressive, in written testimony to the Division of Insurance.

The Patrick administration last year undertook an ambitious overhaul of the Massachusetts auto insurance market, which was the last one in the country where rates were set by regulators.

Under the new system, companies set their own rates and have greater flexibility to introduce innovative product features and discounts for different drivers. The overhaul was also intended to address problems with how high-risk drivers were assigned to companies. Some insurers claimed their competitors were able to manipulate the old sys tem to avoid paying their fair share for undesirable drivers, who typically generate more claims, causing losses for insurers.

Since auto policies only started renewing this month, relatively few motorists have signed up for policies under the new rates, which are expected to be lower for most drivers.

At the center of the current dispute are rules enacted this year by Insurance Commissioner Nonnie S. Burnes that control the so-called residual market for bad drivers, such as those with numerous moving violations. A public comment period on the rules ends tomorrow, and they must eventually be finalized by Burnes. Under the new system, insurance companies will be assigned high-risk drivers randomly, and are expected to cover such drivers commensurate with their share of the market.

But companies just entering Massachusetts will receive an exemption for almost three years.

"This result is patently unfair to existing companies, especially when one considers how quickly a large company with significant resources can gain market share when entering a new state," wrote Paula W. Gold, vice president and chief regulatory counsel for Plymouth Rock Assurance Corp. of Boston, in testimony to the Division of Insurance. "There should be no free ride for any carrier."

John F. Kittel, executive vice president of Arbella Insurance Group, said in written testimony that with the three-year wait in place, "the rest of the market is subsidizing the new entrant."

He said insurers should be able to provide timely market share data to the state, so there's no practical reason why new entrants could not take on their share of undesirable drivers quickly.

Chubb Group of Insurance Companies, which is based in New Jersey and does not sell auto policies in Massachusetts, disagreed. Michael W. O'Malley, senior vice president of state government affairs for the company, wrote in testimony that an insurer needs to be selling for at least a year before accurate market share numbers can be compiled. He said the rules giving new entrants in Massachusetts three years without high-risk driver assignments are similar to the "tried and true" methods used in about 40 other states.

Progressive, which will begin Internet-only sales May 1, acknowledged in its testimony that it is viewed by some as getting a "free ride" under the new system. But the insurer disagreed with the characterization and said it would voluntarily write policies for high-risk drivers, and thereby avoid random assignment of such customers.