Massachusetts’ move toward a more competitive auto insurance industry is facing resistance.
Some consumer advocates are criticizing the state insurance commissioner’s proposed “managed competition” rules, saying the measures don’t go far enough to protect urban and low-income drivers from higher rates.
The proposed rules, released by Insurance Commissioner Nonnie S. Burnes on Aug. 28, would bar insurers from using various socioeconomic factors in rating or underwriting policies, including gender, marital status, education, occupation and homeownership.
And, during a one-year transition starting on April 1, 2008, credit scores will be prohibited in setting rates.
But consumer advocate Stephen D’Amato said the way the regulations are drafted leaves plenty of loopholes for insurance companies. Burnes should have listed what factors would be allowed in underwriting and rating instead of naming the prohibited ones, he said.
“By going the opposite route and banning a few factors, there are scores of other factors that insurers will come up with,” said D’Amato, a consultant for the Center of Insurance Research, a nonprofit consumer advocacy group based in Cambridge, Mass. “There are lots of ways to circumvent these restrictions.”
In addition, D’Amato said, Burnes didn’t prohibit the use of credit scores in underwriting, meaning insurance companies could refuse to insure drivers with lower scores even if their driving record is good. Those drivers would be directed into the “assigned risk” pool.
The proposed rules governing managed competition are scheduled for a public hearing on Sept. 20 at the Division of Insurance in Boston. And some state legislators, leery of the use of socioeconomic factors, were said to be considering holding hearings of their own this week.
For decades, Massachusetts has heavily regulated car insurance, employing a “fixed and established” rate system in which the commissioner set a rate annually for insurers.
Currently, most socioeconomic factors cannot be used in Massachusetts, which is the only state where the rates are set by regulators. Insurers commonly use those factors in other states.
Under Burnes’ proposal, the state would switch a “file and set” system in which insurers will propose rates and rating criteria and implement them unless the commissioner objects.
State officials are hoping the switch will woo back to the state many of the major national companies that have refused to do business in such a heavily regulated environment. Currently, there are 19 insurance carriers operating in Massachusetts.
The new system “incorporates significant consumer protections and benefits, safeguards to ensure a smooth transition and prevent market disruption,” Burnes said in a statement when she released the proposed rules.
The new regulations garnered praise from some quarters, including from Liberty Mutual Insurance Co., which is based in Boston and underwrites car insurance in Massachusetts.
“Gov. [Deval] Patrick and Commissioner Burnes have created a framework in which insurers at last have the ability to deliver competitive pricing and product innovation that Massachusetts consumers have long deserved, without sacrificing the necessary consumer protections and subsidies,” James MacPhee, Liberty’s senior vice president and New England region general manager, said in a statement.
James Harrington, executive director of the Massachusetts Insurance Federation, a trade association of insurers that lobbied heavily for a more competitive car insurance system, said Burnes is “taking a very responsible and measured stance.”
The federation – 11 of the 19 insurers that underwrite car insurance in Massachusetts are members, Harrington said – is not taking issue with the “transitional” ban on socioeconomic factors in rating and underwriting, he said. “We don’t want the debate [about managed competition] to hinge on that.”
Although he’s not against a competitive system, D’Amato saod je plans to testify against Burnes’ proposed rules because they allow insurance companies to get around the restrictions.
For instance, he said, carriers could consider how much insurance a customer has purchased in the past when setting rates, or how many cars that person owns. “That does give you an idea about how wealthy a person is,” D’Amato said. “If you have a good imagination, you can come up with an endless number of factors.”
“I think this is an industry-oriented regulation, and it’s not going to protect the consumer,” he added. •
