Mass. Rejects Flex-Band Auto Rating

NU Online News Service, Aug. 14, 3:30 p.m.EDT?The Massachusetts insurance commissioner has refusedto change the state's private passenger automobile rating processto a "flex-band" approach favored by some insurers and insurertrade associations.

By law, each year the Massachusetts commissioner must assess thedegree of competition in the state's private passenger automobileinsurance marketplace.

The Indianapolis, Ind.-based National Association of MutualInsurance Companies, among others, tried to convince CommissionerJulie Bowler, during hearings related to the competitionassessment, to abandon the "fix-and-establish" rate-settingprocedure in favor of a flex-band method.

Neil Alldredge, NAMIC's director of state affairs, explainedthat under "fix-and-establish" or "fixed expense" rating, autoinsurers submit their expenses as part of their rate filing and thestate Division of Insurance throws out the lowest and highestexpense figures and averages the rest.

Under a "flex-band" approach, which Mr. Alldredge described as aform of flex rating, each insurer develops its expenses based onits own administrative costs, and those are the expenses that areused in calculating that insurer's rates.

"The current system forces all companies to use the sameexpenses regardless of their actual costs," Mr. Alldredge pointedout. "We are disappointed that the commissioner decided to take astatus quo approach to rate regulation this year."

Mr. Alldredge added that under state law the Massachusettscommissioner has "a lot of authority" in respect to the insurancemarketplace in the state and can "do almost anything without goingto the legislature." But he noted that the commissioner may haverefused to act in this case because she was afraid that herauthority would be challenged in court.

"There were ambiguities in the law and divergent opinions aboutthe commissioner's authority to adopt flex-band rating," said ChrisGoetcheus, a spokesperson for the Division of Insurance.

Mr. Goetcheus added that the flex-band method was rejectedbecause none of the legal opinions solicited during the hearingsresolved how driver subsidies could be incorporated into theflex-band approach. He noted that such subsidies are available toinner-city and inexperienced (less than six years of experience)drivers, who typically pay the highest premiums.