Fireman’s Fund Insurance Cos. has a tiny share of the Massachusetts auto liability
market, about 22,000 of the state’s roughly 4.5 million drivers – less than
1 percent. But the company has plenty of exposure: about 9,100 of those customers
are assigned risks.
As it is, Massachusetts has an unusually large risk pool, 8.88 percent of drivers, compared with Rhode Island’s 2.85 percent (North Carolina is the worst, at 22.3 percent, according to the Property Casualty Insurers Association of America).
But Fireman’s Fund, with a 41-percent share of bad risks, is a prime example of the Massachusetts auto insurance market’s dysfunctions. Because high risks aren’t assigned in proportion to market share, but rather in clusters, some insurers, especially small ones, end up with disproportionately large numbers of bad risks – and losses.
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In 2002, auto liability insurers’ statewide loss ratio was 77 percent. Yet while the top 10 companies’ losses ranged from 55 percent to 87.2 percent, half of the next 10 were over 100 percent, including Fireman’s, at 116.7 percent, and Pilgrim Insurance Co., at 185.8 percent.
The risk assignment system is only one of several reasons why, as a lawyer for Fireman’s testified in July, “Massachusetts is a challenging marketplace for personal automobile insurance.” The state also limits the gap between what carriers can charge the best and worst risks, effectively subsidizing urban, young and unsafe drivers at suburban, older and safer drivers’ expense.
And the state caps annual rate increases at the same level for all carriers. For 2005, the State Rating Bureau has recommended 1 percent, a compromise between a 9.2-percent hike requested by insurers and a 6-percent cut sought by the state attorney general. Insurance Commissioner Julie Bowler has until Dec. 15 to decide the case.
All together, the Bay State’s auto-insurance rules are a “severe hindrance” to doing business, especially as a smaller company, spokesman John Kozero said in an interview. “It is impossible for us to even consider making a profit.”
So in June, Fireman’s, a California-based division of Allianz Group of Munich, announced it would leave Massachusetts, effective Dec. 31. It would be the second time that Fireman’s, a 141-year-old company, pulls out of the Bay State; it had been in the area since the early 1900s but left for about five years in the 1980s. As required by the state, Fireman’s will have to pay about $5.5 million to cover its potential losses.
If the plan goes through, Fireman’s would be the 35th auto insurer to leave Massachusetts since 1990.
State officials have acknowledged the system is in crisis. In April, Gov. Mitt Romney appointed a task force to devise major reforms, and at Bowler’s request, the governing committee of Commonwealth Automobile Reinsurers came up with a new plan for assigning high risks this summer that Kozero said “would’ve been perfect” to solve Fireman’s biggest problem and get the company to stay.
But even the CAR plan, which would give Massachusetts a market share-based risk assignment system like most states have, includes a three-year transition period, meaning the improvements would come slowly. And finalizing the plan, whose passage seemed imminent in July, is taking several months.
As good as the insurers found the plan, many consumer advocates feared it would hurt Massachusetts drivers, push up their rates and make it harder for urban residents to get coverage. In response, Bowler asked CAR to make several revisions to the proposal. A public hearing on the amended plan was finally held last Wednesday.
As for the bigger picture, the governor’s task force is “still meeting, and still plugging along,” according to Lisa Kurdziel, of the Office of Consumer Affairs and Business Regulation. Asked when the group might be done, Kurdziel said there is “no timeline” – and the task force isn’t talking “while they’re halfway done.”
“There’s a lot of balls in the air, so it’s really premature to say anything,” she said. Kurdziel wouldn’t comment, either, on growing criticism from the industry that the state is dragging its feet on reform. Romney’s office, for its part, declined all comment – a change from the governor’s outspokenness on the subject this spring.
As for Fireman’s, the plan is still on to pull out of the Massachusetts auto market, though the company will continue to offer its other property and casualty lines. Kozero stressed that Fireman’s isn’t trying to leverage its imminent departure to play politics; he expressed concern that being quoted in this article would make it seem so, when in reality Fireman’s is just waiting to see what happens.
“We still hope that a resolution can be found in some way for reform to be passed,” Kozero said. “Even a last-minute reform would be welcome.”
