AIG, Inc. continues to work with regulators during this difficult time for financial markets. As has been stated many times publicly, AIG Property Casualty Insurance is not a solvency risk; the value of its assets exceeds its liabilities.
AIG Private Client Group is continuing to write new business.
In addition, here are a few more important facts to note:
*AIG Private Client Group, which operates as part of AIG Property Casualty Insurance, faces no such liquidity concerns.
*AIG Property Casualty Insurance has $26.7 billion in policyholder surplus, as well as invested assets of $65 billion. These assets are protected by law and cannot be taken from policyholders!
As a point of reference, a leading AIG Private Client Group competitor has policyholder surpluses of $14 billion.
As you likely know, yesterday AIG reached an agreement in principle with the New York State regulators to exchange illiquid assets from the parent company with more liquid assets in operating insurance companies. These assets are of like kind and quality to one another; the only difference is duration.
AIG Property Casualty Insurance has the resources to pay policyholder claims and will continue to do so. On average, we are paying $73 million in claims each day.
AIG Property Casualty Insurance was downgraded by A.M. Best yesterday. Even with this downgrade, our insurance companies carry a rating of “A” or “Excellent.” This rating compares favorably with most major companies.
AIG Property Casualty Insurance results:
*AIG Commercial Insurance continues to exhibit strong financial performance with 2008 second quarter operating income of nearly $1 billion, net written premiums of $5.99 billion and a profitable combined ratio of 93.7%.
*AIG Private Client Group’s year-to-date results: $87.3 million in operating income; $520 million in net written premium; combined ratio of 81.4%.
We remain committed to, and capable of, serving the needs of our policyholders. If you have any questions, please contact your local representative. Thank you for your continued support of AIG Private Client Group.
Copyright © 2008 American International Group, Inc. All rights reserved.
AIG Private Client Group, 70 Pine Street, 21st Floor, New York, NY 10270
Monday, September 22, 2008
Wednesday, September 17, 2008
Fed takes over AIG
Fed in AIG rescue - $85B loan
Government response reaches dramatic new level: U.S. will take 80% stake in nation's largest insurer to prevent global financial chaos.
NEW YORK (CNNMoney.com) -- In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.
The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.
Officials decided they had to act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.
An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale.
"[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.
The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.
The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates.
AIG will sell certain of its businesses with "the least possible disruption to the overall economy." The government will have veto power over the asset sales and the payment of dividends to shareholders.
The company's management will be replaced, though Fed staffers did not name the new executives. Edward Liddy, the former head of insurer Allstate Corp (ALL, Fortune 500)., will lead the company, the Wall Street Journal reported.
The board will remain. For customers, it will be business as usual, officials said.
Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.
The government had resisted throwing a lifeline to AIG, hoping to entice investment firms to set up a $75 billion rescue fund. Officials opted not to bail out Lehman Brothers, which filed for bankruptcy on Monday. But by Tuesday night, it became clearer that the private sector would not step in to help AIG, which has a greater reach into other financial companies and markets than Lehman does.
"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," said Treasury Secretary Henry Paulson. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."
Dramatic end, high stakes
The firm's options grew more limited as the day wore on. Its already-battered share price fell another 21% with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading.
At one point Tuesday morning, shares fell more than 70% - a day after losing 61% of their value.
In a statement late Tuesday night the company said, "AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis."
The company also commended the Federal Reserve and the Treasury Department for "taking action to address AIG's liquidity needs and broader financial market concerns."
Furthermore, the firm expressed its gratitude to New York Governor Paterson, and other NY State as well as Federal officials.
New York State officials, who regulate the insurance titan, had urged the federal government to rescue AIG. The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.
Pleased with the federal government's response, New York Gov. David Paterson said Tuesday night: "Policy holders will be protected. Jobs will be saved. Business will continue."
The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts meant AIG (AIG, Fortune 500) could be forced to post more than $13 billion in additional collateral.
Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.
The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement. Also, the moves would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.
All the while, analysts urged the company to unveil its restructuring plan.
"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," Rob Haines, analyst at CreditSights, said Tuesday.
Global ripples
The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.
"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."
AIG has had a very tough year.
Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.
Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.
AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.
The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.
This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.
The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan, and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), in his place.
Government response reaches dramatic new level: U.S. will take 80% stake in nation's largest insurer to prevent global financial chaos.
NEW YORK (CNNMoney.com) -- In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.
The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.
Officials decided they had to act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.
An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale.
"[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.
The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.
The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates.
AIG will sell certain of its businesses with "the least possible disruption to the overall economy." The government will have veto power over the asset sales and the payment of dividends to shareholders.
The company's management will be replaced, though Fed staffers did not name the new executives. Edward Liddy, the former head of insurer Allstate Corp (ALL, Fortune 500)., will lead the company, the Wall Street Journal reported.
The board will remain. For customers, it will be business as usual, officials said.
Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.
The government had resisted throwing a lifeline to AIG, hoping to entice investment firms to set up a $75 billion rescue fund. Officials opted not to bail out Lehman Brothers, which filed for bankruptcy on Monday. But by Tuesday night, it became clearer that the private sector would not step in to help AIG, which has a greater reach into other financial companies and markets than Lehman does.
"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," said Treasury Secretary Henry Paulson. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."
Dramatic end, high stakes
The firm's options grew more limited as the day wore on. Its already-battered share price fell another 21% with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading.
At one point Tuesday morning, shares fell more than 70% - a day after losing 61% of their value.
In a statement late Tuesday night the company said, "AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis."
The company also commended the Federal Reserve and the Treasury Department for "taking action to address AIG's liquidity needs and broader financial market concerns."
Furthermore, the firm expressed its gratitude to New York Governor Paterson, and other NY State as well as Federal officials.
New York State officials, who regulate the insurance titan, had urged the federal government to rescue AIG. The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.
Pleased with the federal government's response, New York Gov. David Paterson said Tuesday night: "Policy holders will be protected. Jobs will be saved. Business will continue."
The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts meant AIG (AIG, Fortune 500) could be forced to post more than $13 billion in additional collateral.
Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.
The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement. Also, the moves would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.
All the while, analysts urged the company to unveil its restructuring plan.
"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," Rob Haines, analyst at CreditSights, said Tuesday.
Global ripples
The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.
"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."
AIG has had a very tough year.
Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.
Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.
AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.
The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.
This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.
The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan, and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), in his place.
Tuesday, June 17, 2008
Master Policy Deductibles
June 2008
A few years ago I did a Tech Talk on this subject. Based on the emails I have received in the last few months … perhaps it bears repeating and updating …
Condominium Master Policy deductibles … can they be deadly for personal lines clients who live in condominium units? Yes!
First … in a condominium arrangement who insures what??????
That can be an EXCELLENT question! We all know that when one buys into a condominium situation – shared ownership – one receives two different ownership interests. First, the individual unit for living is individually owned. If I buy a condominium unit, it belongs to me. Everything in that unit that I can touch, I own!
I also receive “common” ownership in the non-individual or common areas such as land, roof of building, common walls, common beams, swimming pools, etc. In Massachusetts, as in most other states, the Association is required to purchase insurance on common areas.
How does the individual unit get insured?
That depends. It depends on the bylaws or insuring agreement in the condominium documents. Sometimes the bylaws only require the Association to insure commonly owned area and the individual unit owner must insure ALL of his/her individual unit. The individual unit owner accomplishes this through the purchase of large amounts of Coverage A – Dwelling value under the HO-6 Unit-owner policy. This can be expensive for the unit owner, but insurance coverage can be easily obtained.
In other situations the Association agrees to “take on” the responsibility of insuring individually owned unitbuilding items through a discussion in the bylaws. The Association may insure ALL building items in the individual units or just some of the individually owned unit-building items. One must read the bylaws carefully to determine what, if any, insurance responsibility is left for the unit-owner. Does the Association OWN the items in the individual unit. NO, NO, NO!!! But, through the bylaws, a contract, an insurable interest is granted to the Association allowing the Association’s commercial policy to apply to individual unit-owner items.
There are TWO ways where the Master Policy deductible could be a problem for unitowners
Way one … Let’s suppose … The Association, through it’s bylaws, has chosen to accept responsibility for insuring the individually owned items …
The Association buys a Condominium master policy to cover the building items whether common or individually owned … hopefully on a Special Form basis. Suppose the Association purchases a $250 deductible for the Master policy and there is a loss fully contained in one unit, who pays the deductible?
This is a point that the unit-owner should address when purchasing his/her unit. Or, you should have them look into this issue when you sell them their Unit-Owner Policy covering their contents and liability exposures. If the Association chooses to pay the deductible, great! If the Association makes the unit-owner responsible for the deductible …$250 out of pocket for the unit-owner shouldn’t be too much of a hardship!
What if the Association has a $5,000 deductible for all losses …
The bylaws required the association to cover the individually owned units as well as common areas and the loss happens entirely in your client’s unit … a kitchen fire … who pays the deductible amount here?
Again, your client should check into this issue with the Association. Quite often, the Association bylaws state the Association will provide insurance for unit-owner building items, but will NOT cover the deductible. Generally, a loss that is contained in a specific unit is NOT assessed to other fellow unit-owners. The individual unit-owner suffering the loss is expected to pay for the deductible.
How do we cover the deductible in this situation????
I have NO idea!!! I used to think that I knew. Years ago I had read and had been taught that one buys coverage for one’s unit through Coverage A and it would respond to a loss not covered by the Master Policy.
After all … the definition of “Coverage A – Dwelling” in the HO-6 certainly LEADS ME TO BELIEVE that I can insure my “stuff”!
COVERAGE A – Dwelling
We cover:
1. The alterations, appliances, fixtures and improvements which are part of the building contained within the "residence premises";
2. Items of real property which pertain exclusively to the "residence premises";
3. Property which is your insurance responsibility under a corporation or association of property owners agreement; or
4. Structures owned solely by you, other than the "residence premises," at the location of the "residence premises."
Reading the whole policy can be a drag …
However, it appears that the Other Insurance Provision of the HO-6 is being used to NEGATE the individual’s right to insure his/her own property. It’s almost “un-American”!
The Other Insurance Provision has always stated that if the Association and the unit-owner insure the same property, then the Association Master Policy will be primary and the HO-6 will be excess. How can the Master policy cover the same stuff as the HO-6? Well …through the bylaws/condominium documents. If the bylaws told the association to cover the condominium building ..both common areas and individually owned areas then this “contract” provided an insurable interest to the association IN the individually owned unit property. The Unit Deed gave the unit-owner an insurable interest in the individual unit.
Normally when two entities can insure the same thing … the parties themselves determine WHO should do it … and act accordingly.
The following is the ISO 2000 Other Insurance Language. The only difference between the HO-2000 language and the HO-91 language are those words that I crossed out.
F. Other Insurance And Service Agreement
…
2. If, at the time of loss, there is other insurance or a service agreement in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance will be excess over the amount recoverable under such other insurance or service agreement.
The Other insurance clause states that when both the Master Policy and the HO-6 cover the SAME property then the Master Policy is primary and the HO-6 is excess. Now ... just WHAT does that mean? For years many insurance “pundits” explained this to mean that the loss first goes to the Master Policy and then back to the HO-6 for the amount of the loss not paid by the Master Policy … i.e. the Master Policy deductible.
Unfortunately, ISO has chosen not to interpret their policy in this way and stated in the HO-2000 Homeowner filing:
“The unit owner is only covered for the amount of loss that exceeds the amount recovered by the association under its policy. If the association doesn’t recover because of a high deductible or other reasons, the unit-owner does not recover.”
With this interpretation then Coverage A can ONLY be available at the “high-end”… that Coverage A will NOT pick up any master policy deductible. If the bylaws told the association to cover your client’s unit then the client’s Coverage A will ONLY respond when every last dime of the Master policy has paid out.
If the master policy bylaws do NOT insure certain items for the unit-owner, then Coverage A will be the PRIMARY and the ONLY coverage responding to the loss. If the bylaws tell the Association to cover some or all of the unitowner building items, then Coverage A will NOT pick up any Master Policy deductible for damage to these items.
This interpretation is ESPECIALLY dangerous in the light of increasing Master Policy deductibles!!!!!!
What should you do????
If I were you, I would ASK my HO-6 carriers HOW they interpret the Other Insurance Provision. If your carriers agree with the ISO interpretation of the mechanics of the Other Insurance Provision, then Coverage A will NOT respond to a Master policy deductible situation when damage to the individual unit occurs.
How can this loss under the Master Policy deductible be covered?
Under the HO-2000 ISO “addressed” this situation by creating an endorsement to “fix” the Other Insurance Provision. The endorsement that ISO created to fix this situation is HO 17 34 Unit Owner Modified Other Insurance condition. The endorsement merely recites the Other Insurance Clause and adds “whether they can collect on it or not”. I’m not sure what this wording really does … but the filing states that it fixes the problem. Will your carriers sell it? Who knows?
Under the HO-91 this endorsement does not “officially” exist and therefore there is NO WAY to fix this if your carriers take a non-user friendly interpretation. HOWEVER, I was just told by an agent last week that one of his HO-91 carriers had filed the HO 17 34 for use on its HO-6 policies. So …evidentially ..more personal condominium insurance carriers are agreeing with ISO’s interpretation and opting for a “premium generating” endorsement to provide coverage for this situation.
Just what IS the premium for this endorsement?
The ISO premium for the HO 17 34 Unit-Owners Modified Other Insurance condition is 25% of the base premium -- Rule 529 tells you to multiply the HO-6 base premium by 1.25!!! Isn’t that INTERESTING … The “base premium” for an HO-6 is the premium for the Coverage C limit … How ridiculous is this…we are buying an endorsement that applies to BUILDING coverage and rating it based on the amount of CONTENTS the client has.
So ... the MORE contents you have the MORE this endorsement costs … the premium has NOTHING to do with the SIZE of the Master Policy deductible and the amount of Coverage A purchased!!!
WAY TWO …that the Master policy deductible can be a problem…
How is the Master Policy deductible paid when the loss happens to COMMON property?
Suppose a fire burns the commonly owned clubhouse and there is a $10,000 deductible on the Master Policy, how does the Association get this first $10,000 to rebuild? Well, hopefully, there is a “slush fund” to cover deductibles, but I suspect in many associations that is NOT the case. What does the Association management do? They assess the unit-owners since each unit owner owns a share of the clubhouse and other common areas.
Can the unit-owner insure his/her assessment responsibility?
Yes … and no. The unit-owner can insure his/her share of assessments due to “insurance related situations.” Loss Assessment is an additional coverage provided under the HO-6.
7. Loss Assessment
a. We will pay up to $1,000 for your share of loss assessment charged during the policy period against you, as owner or tenant of the "residence premises", by a corporation or association of property owners. The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this policy if owned by you, caused by a Peril Insured Against under Coverage A, other than:
(1) Earthquake; or
(2) Land shock waves or tremors before, during or after a volcanic eruption.
The limit of $1,000 is the most we will pay with respect to any one loss, regardless of the number of assessments. We will only apply one deductible, per unit, to the total amount of any one loss to the property described above, regardless of the number of assessments.
b. We do not cover assessments charged against you or a corporation or association of property owners by any governmental body.
c. Paragraph P. Policy Period under Section I – Conditions does not apply to this coverage.
This coverage is additional insurance
If a loss that would be a covered peril under the unit-owners HO-6 damages COMMON PROPERTY, then the loss assessment additional coverage will pay the unit-owners assessment responsibility up to $1,000. The unit-owner can increase this assessment coverage up to $50,000 with HO 04 35 Increased Loss Assessment Endorsement for only $25 or so.
What if the Association has a Percentage Windstorm deductible and there is MAJOR windstorm damage to common property??????
Suppose your client purchased HO 04 35 Increased Loss Assessment coverage in the amount of $50,000 and his/ her assessment share of this Master Policy windstorm deductible is $10,000, will the HO 04 35 respond for the whole $10,000? NO, NO, NO per the following clause in the HO 04 35 Increased Loss Assessment Endorsement:
SPECIAL LIMIT – We will not pay more than $1,000 of your assessment that results from a deductible in the policy of insurance purchased by a corporation or association of property owners.
The HO 04 35 under both the HO-91 as well as the HO-2000 program has a restriction for assessments that are due SOLEY to master policy deductibles.
This endorsement should always be sold for it can be very helpful in other property assessment situations as well as many liability assessment situations but it is NOT helpful in “deductible” assessment situations. The insured will ONLY receive the “free” $1,000 loss assessment coverage that is found under his/her HO-6 unit-owner policy towards an assessment that is due SOLELY to a Master Policy deductible. The rest of the assessment will come “out of pocket.”
Make sure that you address this restriction with your client when selling this endorsement.
I have to admit that I do agree this restriction is NECESSARY in the HO 04 35 Increased Loss Assessment endorsement. Otherwise, the Association would buy commercial property EXCESS policies assuming that each loss will be assessed BACK to the individual unit-owner who has been TOLD to carry HIGH Loss Assessment coverage.
So, back to the original issue… Who pays the Master Policy deductible????
As usual ... the answer is …”it depends.”
Buying a one family house has FEWER insurance headaches than buying into a condominium situation!
* * * * *
A few years ago I did a Tech Talk on this subject. Based on the emails I have received in the last few months … perhaps it bears repeating and updating …
Condominium Master Policy deductibles … can they be deadly for personal lines clients who live in condominium units? Yes!
First … in a condominium arrangement who insures what??????
That can be an EXCELLENT question! We all know that when one buys into a condominium situation – shared ownership – one receives two different ownership interests. First, the individual unit for living is individually owned. If I buy a condominium unit, it belongs to me. Everything in that unit that I can touch, I own!
I also receive “common” ownership in the non-individual or common areas such as land, roof of building, common walls, common beams, swimming pools, etc. In Massachusetts, as in most other states, the Association is required to purchase insurance on common areas.
How does the individual unit get insured?
That depends. It depends on the bylaws or insuring agreement in the condominium documents. Sometimes the bylaws only require the Association to insure commonly owned area and the individual unit owner must insure ALL of his/her individual unit. The individual unit owner accomplishes this through the purchase of large amounts of Coverage A – Dwelling value under the HO-6 Unit-owner policy. This can be expensive for the unit owner, but insurance coverage can be easily obtained.
In other situations the Association agrees to “take on” the responsibility of insuring individually owned unitbuilding items through a discussion in the bylaws. The Association may insure ALL building items in the individual units or just some of the individually owned unit-building items. One must read the bylaws carefully to determine what, if any, insurance responsibility is left for the unit-owner. Does the Association OWN the items in the individual unit. NO, NO, NO!!! But, through the bylaws, a contract, an insurable interest is granted to the Association allowing the Association’s commercial policy to apply to individual unit-owner items.
There are TWO ways where the Master Policy deductible could be a problem for unitowners
Way one … Let’s suppose … The Association, through it’s bylaws, has chosen to accept responsibility for insuring the individually owned items …
The Association buys a Condominium master policy to cover the building items whether common or individually owned … hopefully on a Special Form basis. Suppose the Association purchases a $250 deductible for the Master policy and there is a loss fully contained in one unit, who pays the deductible?
This is a point that the unit-owner should address when purchasing his/her unit. Or, you should have them look into this issue when you sell them their Unit-Owner Policy covering their contents and liability exposures. If the Association chooses to pay the deductible, great! If the Association makes the unit-owner responsible for the deductible …$250 out of pocket for the unit-owner shouldn’t be too much of a hardship!
What if the Association has a $5,000 deductible for all losses …
The bylaws required the association to cover the individually owned units as well as common areas and the loss happens entirely in your client’s unit … a kitchen fire … who pays the deductible amount here?
Again, your client should check into this issue with the Association. Quite often, the Association bylaws state the Association will provide insurance for unit-owner building items, but will NOT cover the deductible. Generally, a loss that is contained in a specific unit is NOT assessed to other fellow unit-owners. The individual unit-owner suffering the loss is expected to pay for the deductible.
How do we cover the deductible in this situation????
I have NO idea!!! I used to think that I knew. Years ago I had read and had been taught that one buys coverage for one’s unit through Coverage A and it would respond to a loss not covered by the Master Policy.
After all … the definition of “Coverage A – Dwelling” in the HO-6 certainly LEADS ME TO BELIEVE that I can insure my “stuff”!
COVERAGE A – Dwelling
We cover:
1. The alterations, appliances, fixtures and improvements which are part of the building contained within the "residence premises";
2. Items of real property which pertain exclusively to the "residence premises";
3. Property which is your insurance responsibility under a corporation or association of property owners agreement; or
4. Structures owned solely by you, other than the "residence premises," at the location of the "residence premises."
Reading the whole policy can be a drag …
However, it appears that the Other Insurance Provision of the HO-6 is being used to NEGATE the individual’s right to insure his/her own property. It’s almost “un-American”!
The Other Insurance Provision has always stated that if the Association and the unit-owner insure the same property, then the Association Master Policy will be primary and the HO-6 will be excess. How can the Master policy cover the same stuff as the HO-6? Well …through the bylaws/condominium documents. If the bylaws told the association to cover the condominium building ..both common areas and individually owned areas then this “contract” provided an insurable interest to the association IN the individually owned unit property. The Unit Deed gave the unit-owner an insurable interest in the individual unit.
Normally when two entities can insure the same thing … the parties themselves determine WHO should do it … and act accordingly.
The following is the ISO 2000 Other Insurance Language. The only difference between the HO-2000 language and the HO-91 language are those words that I crossed out.
F. Other Insurance And Service Agreement
…
2. If, at the time of loss, there is other insurance or a service agreement in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance will be excess over the amount recoverable under such other insurance or service agreement.
The Other insurance clause states that when both the Master Policy and the HO-6 cover the SAME property then the Master Policy is primary and the HO-6 is excess. Now ... just WHAT does that mean? For years many insurance “pundits” explained this to mean that the loss first goes to the Master Policy and then back to the HO-6 for the amount of the loss not paid by the Master Policy … i.e. the Master Policy deductible.
Unfortunately, ISO has chosen not to interpret their policy in this way and stated in the HO-2000 Homeowner filing:
“The unit owner is only covered for the amount of loss that exceeds the amount recovered by the association under its policy. If the association doesn’t recover because of a high deductible or other reasons, the unit-owner does not recover.”
With this interpretation then Coverage A can ONLY be available at the “high-end”… that Coverage A will NOT pick up any master policy deductible. If the bylaws told the association to cover your client’s unit then the client’s Coverage A will ONLY respond when every last dime of the Master policy has paid out.
If the master policy bylaws do NOT insure certain items for the unit-owner, then Coverage A will be the PRIMARY and the ONLY coverage responding to the loss. If the bylaws tell the Association to cover some or all of the unitowner building items, then Coverage A will NOT pick up any Master Policy deductible for damage to these items.
This interpretation is ESPECIALLY dangerous in the light of increasing Master Policy deductibles!!!!!!
What should you do????
If I were you, I would ASK my HO-6 carriers HOW they interpret the Other Insurance Provision. If your carriers agree with the ISO interpretation of the mechanics of the Other Insurance Provision, then Coverage A will NOT respond to a Master policy deductible situation when damage to the individual unit occurs.
How can this loss under the Master Policy deductible be covered?
Under the HO-2000 ISO “addressed” this situation by creating an endorsement to “fix” the Other Insurance Provision. The endorsement that ISO created to fix this situation is HO 17 34 Unit Owner Modified Other Insurance condition. The endorsement merely recites the Other Insurance Clause and adds “whether they can collect on it or not”. I’m not sure what this wording really does … but the filing states that it fixes the problem. Will your carriers sell it? Who knows?
Under the HO-91 this endorsement does not “officially” exist and therefore there is NO WAY to fix this if your carriers take a non-user friendly interpretation. HOWEVER, I was just told by an agent last week that one of his HO-91 carriers had filed the HO 17 34 for use on its HO-6 policies. So …evidentially ..more personal condominium insurance carriers are agreeing with ISO’s interpretation and opting for a “premium generating” endorsement to provide coverage for this situation.
Just what IS the premium for this endorsement?
The ISO premium for the HO 17 34 Unit-Owners Modified Other Insurance condition is 25% of the base premium -- Rule 529 tells you to multiply the HO-6 base premium by 1.25!!! Isn’t that INTERESTING … The “base premium” for an HO-6 is the premium for the Coverage C limit … How ridiculous is this…we are buying an endorsement that applies to BUILDING coverage and rating it based on the amount of CONTENTS the client has.
So ... the MORE contents you have the MORE this endorsement costs … the premium has NOTHING to do with the SIZE of the Master Policy deductible and the amount of Coverage A purchased!!!
WAY TWO …that the Master policy deductible can be a problem…
How is the Master Policy deductible paid when the loss happens to COMMON property?
Suppose a fire burns the commonly owned clubhouse and there is a $10,000 deductible on the Master Policy, how does the Association get this first $10,000 to rebuild? Well, hopefully, there is a “slush fund” to cover deductibles, but I suspect in many associations that is NOT the case. What does the Association management do? They assess the unit-owners since each unit owner owns a share of the clubhouse and other common areas.
Can the unit-owner insure his/her assessment responsibility?
Yes … and no. The unit-owner can insure his/her share of assessments due to “insurance related situations.” Loss Assessment is an additional coverage provided under the HO-6.
7. Loss Assessment
a. We will pay up to $1,000 for your share of loss assessment charged during the policy period against you, as owner or tenant of the "residence premises", by a corporation or association of property owners. The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this policy if owned by you, caused by a Peril Insured Against under Coverage A, other than:
(1) Earthquake; or
(2) Land shock waves or tremors before, during or after a volcanic eruption.
The limit of $1,000 is the most we will pay with respect to any one loss, regardless of the number of assessments. We will only apply one deductible, per unit, to the total amount of any one loss to the property described above, regardless of the number of assessments.
b. We do not cover assessments charged against you or a corporation or association of property owners by any governmental body.
c. Paragraph P. Policy Period under Section I – Conditions does not apply to this coverage.
This coverage is additional insurance
If a loss that would be a covered peril under the unit-owners HO-6 damages COMMON PROPERTY, then the loss assessment additional coverage will pay the unit-owners assessment responsibility up to $1,000. The unit-owner can increase this assessment coverage up to $50,000 with HO 04 35 Increased Loss Assessment Endorsement for only $25 or so.
What if the Association has a Percentage Windstorm deductible and there is MAJOR windstorm damage to common property??????
Suppose your client purchased HO 04 35 Increased Loss Assessment coverage in the amount of $50,000 and his/ her assessment share of this Master Policy windstorm deductible is $10,000, will the HO 04 35 respond for the whole $10,000? NO, NO, NO per the following clause in the HO 04 35 Increased Loss Assessment Endorsement:
SPECIAL LIMIT – We will not pay more than $1,000 of your assessment that results from a deductible in the policy of insurance purchased by a corporation or association of property owners.
The HO 04 35 under both the HO-91 as well as the HO-2000 program has a restriction for assessments that are due SOLEY to master policy deductibles.
This endorsement should always be sold for it can be very helpful in other property assessment situations as well as many liability assessment situations but it is NOT helpful in “deductible” assessment situations. The insured will ONLY receive the “free” $1,000 loss assessment coverage that is found under his/her HO-6 unit-owner policy towards an assessment that is due SOLELY to a Master Policy deductible. The rest of the assessment will come “out of pocket.”
Make sure that you address this restriction with your client when selling this endorsement.
I have to admit that I do agree this restriction is NECESSARY in the HO 04 35 Increased Loss Assessment endorsement. Otherwise, the Association would buy commercial property EXCESS policies assuming that each loss will be assessed BACK to the individual unit-owner who has been TOLD to carry HIGH Loss Assessment coverage.
So, back to the original issue… Who pays the Master Policy deductible????
As usual ... the answer is …”it depends.”
Buying a one family house has FEWER insurance headaches than buying into a condominium situation!
* * * * *
Tuesday, May 6, 2008
MAIA Cautions Consumers About Progressive Quotes
MAIA Cautions Consumers About Progressive Quotes;
Files Formal Complaint With DOI
Today, MAIA issued a press release to every daily newspaper in the state cautioning consumers about serious issues with quotes received from the Progressive Direct website. After initial reports of "dirt cheap" rates, MAIA took a long, hard look at the quotes produced by the site.
According to MAIA President and CEO Frank Mancini, "Our review of the quotes provided by Progressive reminds us of the old saying, 'it it looks too good to be true, it probably is.' Consumers should use extreme caution when requesting online quotes because a computer doesn't ask the questions a live person would ask to be sure you are adequately protected."
Since many of MAIA's issues with the website are believed to be serious violations of the managed competition regulation, MAIA has also filed a formal complaint with Commissioner Nonnie Burnes and notified Attorney General Martha Coakley and Undersecretary of the Office of Consumer Affairs & Business Regulation Daniel Crane of the violations.
The most flagrant violations include:
Progressive requires anyone requesting a quote to provide their social security number, gender, recent military service and marital status. The quote process also informs applicants that Progressive obtains credit reports and credit scoring information, which is prohibited in Massachusetts for both rating and underwriting purposes.
Progressive acknowledges that Massachusetts law requires that every insurer offer twelve-month term private passenger motor vehicle insurance policies at the consumer's option, yet there is nowhere on the Progressive site where a consumer may exercise that option. When questioned on the phone about a twelve-month policy, a Progressive representative admitted that twelve-month policies are not available.
Comparative quotes of Progressive rates with the rates of other companies writing autoinsurance in Massachusetts are inaccurate and use a policy term of six months which is notavailable from any other insurance company in Massachusetts. While other insurance company quotes include an indication of the impact of your driving record in terms of surcharges for at-fault accidents and conviction of traffic violations and credits for good driving, the Progressive quote does not appear to include merit rating information.
We have posted the complete text of the MAIA press release on our website, and you may access it by clicking here.
It is imperative that the information in this press release be seen by as many consumers as possible, and we need your help with this. If you have contacts with your local daily and weekly newspapers, please walk the press release into your contact as soon as possible. Offer to answer any questions your contact or consumer reporters have, or refer them to us if you're not comfortable in that role.
We have also posted a copy of our complaint letter to the Commissioner on massagent.com. You may access this document by clicking here.
Please feel free to contact Frank Mancini or Donna McKenna or by phone at 800.972.9312 or 508.628.5452 if you have questions or need additional information.
Files Formal Complaint With DOI
Today, MAIA issued a press release to every daily newspaper in the state cautioning consumers about serious issues with quotes received from the Progressive Direct website. After initial reports of "dirt cheap" rates, MAIA took a long, hard look at the quotes produced by the site.
According to MAIA President and CEO Frank Mancini, "Our review of the quotes provided by Progressive reminds us of the old saying, 'it it looks too good to be true, it probably is.' Consumers should use extreme caution when requesting online quotes because a computer doesn't ask the questions a live person would ask to be sure you are adequately protected."
Since many of MAIA's issues with the website are believed to be serious violations of the managed competition regulation, MAIA has also filed a formal complaint with Commissioner Nonnie Burnes and notified Attorney General Martha Coakley and Undersecretary of the Office of Consumer Affairs & Business Regulation Daniel Crane of the violations.
The most flagrant violations include:
Progressive requires anyone requesting a quote to provide their social security number, gender, recent military service and marital status. The quote process also informs applicants that Progressive obtains credit reports and credit scoring information, which is prohibited in Massachusetts for both rating and underwriting purposes.
Progressive acknowledges that Massachusetts law requires that every insurer offer twelve-month term private passenger motor vehicle insurance policies at the consumer's option, yet there is nowhere on the Progressive site where a consumer may exercise that option. When questioned on the phone about a twelve-month policy, a Progressive representative admitted that twelve-month policies are not available.
Comparative quotes of Progressive rates with the rates of other companies writing autoinsurance in Massachusetts are inaccurate and use a policy term of six months which is notavailable from any other insurance company in Massachusetts. While other insurance company quotes include an indication of the impact of your driving record in terms of surcharges for at-fault accidents and conviction of traffic violations and credits for good driving, the Progressive quote does not appear to include merit rating information.
We have posted the complete text of the MAIA press release on our website, and you may access it by clicking here.
It is imperative that the information in this press release be seen by as many consumers as possible, and we need your help with this. If you have contacts with your local daily and weekly newspapers, please walk the press release into your contact as soon as possible. Offer to answer any questions your contact or consumer reporters have, or refer them to us if you're not comfortable in that role.
We have also posted a copy of our complaint letter to the Commissioner on massagent.com. You may access this document by clicking here.
Please feel free to contact Frank Mancini or Donna McKenna or by phone at 800.972.9312 or 508.628.5452 if you have questions or need additional information.
Thursday, April 17, 2008
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.
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.
Tuesday, March 25, 2008
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.
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.
Wednesday, March 12, 2008
Goal: More Insurance Choices
By Jerry Kronenberg
Wednesday, March 12, 2008
Boston Herald
Market watchers hope Massachusetts’ new “managed-competition” car-insurance system puts Nationwide on our side - along with Geico, AIG and other firms that have avoided the Bay State for virtually decades.
“If consumers get more choices, that’s a good thing,” state Insurance Commissioner Nonnie Burnes said, saying more firms might enter Massachusetts once the new system starts on April 1.
Burnes said more than 80 percent of insurers quit the Massachusetts car-insurance business during the 30 years that the state heavily regulated rates. Other underwriters never set up shop at all.
All told, only half of the nation’s 10 largest car-insurance firms currently operate here.
However, No. 3 insurer Progressive recently announced plans to begin writing policies under the new system. So has smaller underwriter Peerless, a subsidiary of Boston’s Liberty Mutual.
“The new system hasn’t even started yet and we already have two new (insurers),” Burnes said. “I don’t think that’s a bad start.”
Massachusetts had 111 insurers in place when the state began setting car-insurance rates in 1977.
But 92 have left since then, with no one coming in to replace them.
“Under the old system, it was very difficult for most companies to make money here,” said Frank O’Brien of the Property Casualty Insurers Association of America. “But assuming managed competition sticks, I think we should see more companies coming here.”
Still, Stephen D’Amato of the Center for Insurance Research said adding new insurers “is only a good thing if it produces lower, fairer rates for consumers.”
D’Amato claims the new system gives insurers too much power to base rates not just on driving records, but also on things such as homeownership - factors he said favor the rich.
“Competition can be good,” D’Amato said, “but not the way it’s being implemented.”
Wednesday, March 12, 2008
Boston Herald
Market watchers hope Massachusetts’ new “managed-competition” car-insurance system puts Nationwide on our side - along with Geico, AIG and other firms that have avoided the Bay State for virtually decades.
“If consumers get more choices, that’s a good thing,” state Insurance Commissioner Nonnie Burnes said, saying more firms might enter Massachusetts once the new system starts on April 1.
Burnes said more than 80 percent of insurers quit the Massachusetts car-insurance business during the 30 years that the state heavily regulated rates. Other underwriters never set up shop at all.
All told, only half of the nation’s 10 largest car-insurance firms currently operate here.
However, No. 3 insurer Progressive recently announced plans to begin writing policies under the new system. So has smaller underwriter Peerless, a subsidiary of Boston’s Liberty Mutual.
“The new system hasn’t even started yet and we already have two new (insurers),” Burnes said. “I don’t think that’s a bad start.”
Massachusetts had 111 insurers in place when the state began setting car-insurance rates in 1977.
But 92 have left since then, with no one coming in to replace them.
“Under the old system, it was very difficult for most companies to make money here,” said Frank O’Brien of the Property Casualty Insurers Association of America. “But assuming managed competition sticks, I think we should see more companies coming here.”
Still, Stephen D’Amato of the Center for Insurance Research said adding new insurers “is only a good thing if it produces lower, fairer rates for consumers.”
D’Amato claims the new system gives insurers too much power to base rates not just on driving records, but also on things such as homeownership - factors he said favor the rich.
“Competition can be good,” D’Amato said, “but not the way it’s being implemented.”
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