In what may be a new chapter in the so-called 'Massachusetts Miracle," carriers for the first time in perhaps 30 years are displaying signs of optimism regarding the auto insurance market, as the state prepares to transition from a government-mandated rating structure to what it is calling a "managed competition" system.

Essentially, instead of rates for all companies being set entirely by the state's Division of Insurance, insurers will be allowed to submit their own rates for approval. This is being hailed by many industry observers as a significant step for a state that has not seen a market based on competition since 1977--and even then for only a brief five-month period.

Across the country, the auto insurance market has, in recent years, been seen as vibrant and competitive--with Massachusetts a glaring exception. According to the Division of Insurance, 35 insurers have left the market since 1990, and only 19 carriers remain in the state.

Fitch Ratings, in a report released on March 13, said the Massachusetts market environment "contributed to past periods of statewide underwriting results that were considerably worse than national norms," and while the rating agency said conditions have improved in recent years, it noted that the system has "discouraged large national players from writing in the market."

Indeed, insurers viewed the state as "the last vestige of another era in insurance," according to Robert P. Hartwig, president of the Insurance Information Institute.

Describing the Massachusetts auto market in some detail, and outlining the changes to be implemented on April 1, was Frank Mancini, president and chief executive officer of the Massachusetts Association of Insurance Agents, an affiliate of the Independent Insurance Agents and Brokers of America.

"For decades, going back to the 1920s, Massachusetts private passenger insurance rates have been set by the commissioner of insurance," he said. "With the exception of a five-month period back in 1977, the commissioner has always set the rate, meaning that all companies charge the same rates for the same policy for the same coverages. Everything was plain vanilla."

However, beginning on April 1, he noted, Insurance Commissioner Nonnie S. Burnes will move to "what she is calling 'managed competition.' Back in 1976, the legislature passed a statute that moved the private passenger auto system from what they call 'fixed and established' to a competitive system. ...[I]t did go into effect and it was used for about five months, but the legislature was unhappy with the results, so they suspended the use of that statute and they moved back to the fixed and established system."

The statute authorizing a competitive system, however, remained on the books, Mr. Mancini said, with the commissioner retaining authority to "brush that statute off and implement it--so that's what she did."

Commissioner Burnes, in a statement released in July, outlined the need for a change by pointing to the findings of a seven-member study group appointed by Democratic Gov. Deval Patrick. The group determined the Massachusetts rating system was "ailing, and that some form of competitive rating is essential to attract and retain insurers to write this line of business in the Commonwealth."

The new rating structure will be similar to a prior-approval system, explained Mr. Hartwig. "Effectively what they're going to do is allow insurers to file their own individual rates. They will still be subject to an approval process by the state, but what that means is [insurers] will more easily and more readily be able to reflect the true cost of operating, reflect their own expense structure, reflect their own expectation of profit."

He added that "basically, the state will look at that, deem the methodology by which they determine the rates to be reasonable, and allow the market to make a decision as to who will be more successful than someone else."

Consumer controls and subsidies that have been a part of the Massachusetts regulatory structure will remain intact, at least for the short term.

In an Aug. 28 letter that accompanied the commissioner's initial managed competition regulation, Ms. Burnes said: "This proposed regulation bans the use, in rating, of sex, marital status, race, creed, national origin, religion, occupation, income, education, homeownership and age (except to effect the discount for insureds age 65 or older, as required by law) as against public policy."

She added that "insurers may not use age (except for the over 65 discount), sex, race, occupation, marital status, or principal place of garaging in underwriting; nor should they use education or home ownership in underwriting."

Additionally, she banned the use of credit information for rating and underwriting during a one-year transition period, with the intention of addressing that controversial issue further at a later date.

The subsidies that will remain are meant to control rates for urban drivers. Fitch explained that "Massachusetts has a long history of subsidizing young, urban and inexperienced drivers by charging higher rates to older, suburban drivers."

Stressing that insurers will not have free rein in setting rates, Commissioner Burnes said in her letter that "when I issued my decisions on July 16, I stated then, and restate today, that I, as commissioner of insurance, retain broad statutory authority and regulatory powers. I will not hesitate to disapprove rates that are excessive, inadequate, or unfairly discriminatory or violate public policy."

While insurers view some of the remaining controls as obstacles to be overcome at a later date, Mr. Mancini said the commissioner's hands-on approach may allow this managed competition experiment to succeed where the previous competition-based scheme failed in the 1970s.

"One of the things that happened in the '70s is that the commissioner then didn't...'manage competition,' so companies made rate filings based on what their actuaries told them, and some folks' rates went sky high," he recalled. This was particularly true for those who had subsidized rates and then saw those subsidies disappear, Mr. Mancini noted.

"And this year," he continued, "the commissioner said that at least to get this thing off the ground, she wanted the subsidies to stay in the system--and the subsidies aren't as much today as they were 30 years ago--and she also prohibited any company from increasing [a driver's rates] by more than 10 percent, so no one was going to see 20-, 30-, 40 percent rate increases. So the commissioner has really put the lid on this so that we wouldn't see another 1977."

So far, industry reaction has been positive. Insurers have filed their rates for approval with the Division of Insurance, and the result is an average reduction across the state's 19 insurers of 7.8 percent. Fitch noted that insurers have begun to offer accident forgiveness, discounts for good students and loyalty, and broader coverage such as enhanced towing and for personal belongings.

Fitch also stated that Progressive will enter the market on May 1, Hanover will add more independent agent distributors, and Liberty Mutual will grow its Massachusetts sales force by 50 percent.

Mr. Mancini said Vermont Mutual and Preferred Mutual have indicated they will enter the market as well, although they have given no date to join the party.

As for major auto insurers State Farm, Allstate and GEICO, Fitch said the three have "adopted a wait-and-see attitude."

"Some may feel they need to see these reforms remain in place for some period of time before they are encouraged to come in or expand their presence in the state," Mr. Hartwig explained.

But the entrance of Progressive is likely a sign of things to come, according to many in the industry. "Massachusetts is actually one of the largest auto insurance markets in the country, and some insurers will look at this as an opportunity to grow in what is otherwise a very slow-growth market," Mr. Hartwig said.

In a statement released by the Property Casualty Insurers Association of America, President and CEO David Sampson said "Progressive's decision to enter the Massachusetts marketplace is clear evidence that managed competition is working for consumers. It also sends the strong message regarding what can happen when competition is given a chance to develop."

David Snyder, vice president and assistant general counsel for the American Insurance Association, said "companies that have long been out of the Massachusetts market have entered it," adding that the market "has changed almost overnight."

Not all of the reviews are decidedly positive, however.

Fitch, while stating the changes should solve capacity issues and create a more resilient market in the long run, warned that it "expects industrywide private passenger automobile profitability will be challenged in the near term as a result of lower premiums coupled with increased loss costs and expenses."

Fitch added that "given the threat of new entrants, insurers are reducing their rates at a time when nationwide loss costs are increasing, particularly with regard to auto bodily injury claims. Additionally, these companies are experiencing an uptick in the expense ratio as a result of increased advertising costs."

Fitch also noted that the entry of large, direct writers could have an impact on the state's independent agents and regional and Massachusetts-only companies. Currently, 86 percent of consumers in the state buy insurance through independent agents.

"Fitch believes the regional and Massachusetts-only companies will have an initial advantage due to their long-term relationships with, and close proximity to, the agents," said the rating agency, predicting the long-term winners will be those that "offer superior claims service levels and properly price the risks."

Mr. Hartwig said he expects rates, in the long-run, "will reflect the actual cost of doing business in the state."

Looking forward, Mr. Hartwig said insurers initially will be looking to make sure these reforms are maintained. After that, they may press for further reforms such as the use of credit scoring. Mr. Hartwig noted that Massachusetts has operated under a state-managed system for a long time, "so change has to be incremental."

He concluded that "over time, I think as the choices for consumers increase, insurers would hope that they would be able to employ modern underwriting criteria that they use in most states, because that will increase competition further."

Special Reports /

Wheels In Motion On Mass. Auto Reform

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