Mass. Moving To Reform Auto Market

By Mark E. Ruquet

NU Online News Service, Jan. 17, 12:44 p.m.EST?Pushed by a regulator, a group includingrepresentatives of various insurance sectors is working to developan initial reform proposal for Massachusetts' fractured insurancemarketplace.[@@]

The first step in the effort is a reform of the residual autoinsurance market, industry officials said.

Their efforts are aimed at mending a personal auto insurancesystem that has few carriers and a premium pricing system thatstifles competition because of too much regulation, according toexecutives with various groups..

Working to develop a scheme is the Concerned Industry Committee,a combination of insurance carriers and industry associationsformed a few months ago after prompting from MassachusettsInsurance Commissioner Julianne M. Bowler. The committee's missionis to present a plan to first reform the state's residualmarket.

Unlike other states with residual pools where insurers shareequally in good and bad risks, the state sells insurance throughexclusive representative providers. These agents are assigned asingle carrier. The controls over rates allow no variation inpricing or coverage, and therefore, no competition between theexclusive representatives, independent or direct agents. In turn,there is no control over underwriting or the distribution ofrisks.

"The perception is that rates in the view of the insurers areinadequate," said Jim Harrington, executive director of theMassachusetts Insurance Federation, based in Boston, which is partof the committee. "We and others are engaged in reform of theresidual market because of its inequities. It needs to befixed."

"The system is crazy," said Frank O'Brien, New England regionalmanager for the Property Casualty Insurers Association of America,Des Plaines, Ill. "What we are trying to do is put more sanity backinto the system. The current system is so complicated that itdefies anyone to explain it succinctly or rationally."

The reform efforts have the backing of Massachusetts Gov. MittRomney, who said he would make auto insurance reform an importantpiece of his administration's agenda this year, said ChrisGoetcheus, a spokesman for the Massachusetts Division ofInsurance.

Under the current system, noted Frank Mancini, president of theMassachusetts Association of Insurance Agents, there is a two-tiersystem of agents. He said in many cases the exclusiverepresentative provider can write as much business as he or shewants without penalties from the carriers. On the other hand,traditional independent agents are restricted because of the natureof their relationship with carriers.

"The average customer does not see a difference, unless they askfor a policy with a specific carrier," said Mr. Mancini.

"We see a lot of stress in the market place," he noted. "Thereis not a great deal of capacity. Our aim is to stabilize the marketplace and eliminate the two-tier system."

Since Ms. Bowler became commissioner a year ago, the departmenthas worked to find a method of reforming the residual market systembefore taking the next step at reforming the entire system, saidMr. Goetcheus. Watching with concern over the loss of carriers overthe years, Ms. Bowler felt there was an urgent need to reform themarket, he said.

It was Ms. Bowler who asked members of the industry to come upwith some answers to fix the residual market first, which theindustry cited as a major obstacle to any additional reforms.

"The premise is that you have to fix the infrastructure beforeyou can discuss competitive rating," Mr. Goetcheus said. "You can'tmove into a house without a sound foundation."

Recently, the PCI said that carriers can not be held at faultfor the declining number of companies writing business in thestate, and for the fewer offerings of premium discounts to gooddrivers in Massachusetts.

A major part of the problem, say association executives, is thatthe industry is heavily regulated, with carriers having to gobefore the insurance department for the slightest rate change.

Recently, the division granted the state's 19 insurers a 2.5percent increase for 2004 after the carriers requested an averageincrease of 12.4 percent. The increase is currently being appealedby the state's Attorney General who feels the carriers should notget an increase.

Mr. O'Brien said Massachusetts is unique from any other state inthe country in that it is heavily regulated in all respects and thecommissioner sets all rates. The state has the fewest number ofinsurers in the country, he said, even less than New Jersey, whichhas more than 50 carriers on its books writing insurance in thestate.

Recently, only three carriers submitted plans to offer discountsto good drivers, while the others opted not to offer discountplans.

"The fact that companies had to file for discount plans and gothrough a hearing process to get approval bespeaks the uniquenessand difficulty of this system," said Mr. O'Brien.

But, he added, state officials have recognized that there is a"meltdown" in the industry and they are working on reform.

Both Mr. Harrington and Mr. Mancini said the committees reporton reforming the residual market will be presented within the nexttwo-to-three weeks.