Massachusetts embraces ‘managed competition’

Massachusetts’ effort to open its auto insurance industry to more competition should take another step forward this week, when the state insurance commissioner is expected to release proposed regulations on how “managed competition” will take shape.
The proposal is expected to answer some of the questions critics have had about how the new system will handle the use of socioeconomic factors in underwriting policies.
For decades Massachusetts has heavily regulated auto insurance, employing a “fixed and established” system in which the insurance commissioner set a rate annually for insurers operating in the state.
Now Insurance Commissioner Nonnie Burnes has ruled that the state will switch to a managed competition system in which insurers will propose rates and rating criteria and implement them unless the commissioner objects.
“Drivers stand to realize benefits ranging from lower rates to greater product choices,” Burnes said when her decision was announced last month. “And the marketplace itself will be infused with more stability and capital.”
But critics worry that insurance companies would use socioeconomic factors – instead of driving record alone – to determine what rates to charge consumers.
Those factors, such as occupation, credit scores and income, cannot be used in the fixed-and-established system in place in Massachusetts, which is the only state where the rates are set by regulators. Insurers commonly use those factors in other states.
Burnes said last month that she would look upon the use of socioeconomic factors with “extreme skepticism,” but as of last week she had yet to rule out their use entirely.
And that concerned Stephen D’Amato, a consultant for Center of Insurance Research, a nonprofit consumer advocacy group based in Cambridge, Mass.
“I have no problem with a competitive system,” D’Amato said last week. “Right now, there’s not enough competition. But we should never replace what we have today with what [Burnes was] suggesting. This is making the system much, much worse.”
D’Amato said he believed the formal decision filed by Burnes in July indicated that while insurers would be discouraged from using socioeconomic factors in setting rates, they would be allowed to use them for underwriting. If that were the case, insurance carriers could refuse to insure certain segments of the population. Those drivers would be placed in a so-called “residual market” for high-risk drivers.
Under the current system, drivers in the residual market receive coverage through an industry pool where all insurers share the losses. But as part of Burnes’ overhaul, an “assigned risk plan” would be created under which high-risk drivers would be randomly assigned to insurers.
Sen. Mark Montigny, D-New Bedford, a member of a special state Senate panel examining the matter, said last week that he was concerned that companies would “cherry-pick” whom they want to insure by using factors such as credit scores, education and income.
“What a bunch of bull,” he said last week. “To me, that’s not competition.”
Montigny said he would only support a competitive system that outlaws socioeconomic factors. “We need to find something in the middle,” he said.
The new system is slated to go into effect in April 2008, and hearings on the first draft of Burnes’ regulations are expected to be scheduled in September.
The Massachusetts Association of Insurance Agents had other reasons to oppose a competitive system.
Daniel Foley Jr., the association’s vice president of government affairs, pointed out that insurance rates in Massachusetts have declined about 20 percent in the last three years. “It is our understanding that we’d probably see another rate decrease next year,” Foley said. “If it’s not broke, don’t fix it.”
D’Amato said industry projections show that rates were expected to fall 10 percent in 2008 under the fixed-and-established system, but he added that such a decline probably won’t happen now. “I’d be very surprised if we ended up doing that well” in the new system, D’Amato said.
Currently, there are 19 insurance carriers operating in Massachusetts. Many of the major national companies such as Allstate and Progressive refuse to do business in such a heavily regulated environment. The new system also would allow companies to introduce products and benefits, such as accident forgiveness, that were prohibited before.
Billionaire Warren Buffett, whose Berkshire Hathaway is the parent company of Geico Corp., already has expressed an interest in establishing a presence in Massachusetts. The nation’s fourth-largest auto insurer, Geico offers low insurance rates by selling directly to the consumer instead of through agents. Massachusetts is the only state in which Geico does not do business.
Rick DiGiacomo, owner of Holman Insurance Agency in Attleboro, said it is too early to tell what impact the changes will have on rates, but he’s not too optimistic.
He said he believes the major insurance companies will take a wait-and-see stance in Massachusetts, taking a few years before setting up shop.
Once they arrive, DiGiacomo predicted, rates will initially decline while the major companies battle for market share. Then the rates will bounce back up when the lesser competition is eliminated, he added.
“My personal feeling is it’s only going to lower rates for the top-tier drivers,” DiGiacomo said. “And it’s going to cause havoc for everyone else.” •