Testimony in Opposition to the “assigned risk plan” and in favor of permanently rescinding the adopted regulation

In addition, the Governor’s “study group” on auto insurance which issued a report on March 15, 2007, of which I was a participant, recommended that the assigned risk plan not be adopted until further review and evaluation of the new CAR rules aimed at improving the system. Specifically, the commission recommended, “ the Commissioner should delay implementing any assigned risk plan until able to meaningfully evaluate the results of the 2006 redistribution of exclusive (producers) agents and subsequent revisions to the Commonwealth Automobile Reinsurers rules.”

Testimony in Opposition to the “assigned risk plan” and in favor of permanently rescinding the adopted regulation
Before the Commissioner of Insurance, Nonnie S. Burnes, Massachusetts Division of Insurance

To: Commissioner of Insurance, Nonnie S. Burnes
Massachusetts Division of Insurance
FR: Deirdre Cummings, Legislative Director
RE: Testimony in Opposition to the “assigned risk plan” and in favor of permanently rescinding the adopted regulation.

Docket No. C2004-02.

DT: June 11, 2007

In Opposition to an Assigned Risk Plan

MASSPIRG strongly opposes the adoption of an auto insurance assigned risk plan (MAIP – Massachusetts Auto Insurance Plan) to replace the current reinsurance plan that protects consumers against discrimination by insurers. MASSPIRG continues to believe that the proper path to CAR reform is to monitor the effect of last year’s order by the Division of Insurance to redistribute Exclusive Representative Producers (“ERPs”) and, if necessary to ensure fairness, to modify the formula for dividing the residual market deficit among the insurers while preserving the reinsurance structure of CAR.

As way of context – Massachusetts auto insurance consumers are not calling for changes in the residual market, this is and has been an issue among insurers – some insurers charging others of gaming or manipulating the system. By way of correcting or solving that, consumers should not have to pay the price.

Massachusetts drivers have seen record auto rate declines – over 20% in the last three years and preliminary data suggests that the trend will continue for 2008 (-1.69 in 2005, -8.7 in 2006, -11.7 in 2007). Consumers are protected through a host of consumer protections including mechanisms that prohibit any sort of discrimination; rate flattening which means drivers in our most congested communities get some rate relief – preventing rates from being completely unaffordable; rates are based primarily on driving record and not “predictive” factors that have nothing to do with ones driving record; the rate ceilings are set annually so as to prevent any price gouging or allow for excessive profits by insurers – but allowing for insurers to offer lower rates in the form of discounts; and we have one of the lowest uninsured driving rates in the country. The current MAIP proposal attempts to solve an industry problem at the expense of the consumer and ought not be approved.

 

The MAIP, as modified by CAR would allow insurers to reject drivers – even those with perfect driving records — based on non-driving factors such as credit scores, income, education, and home ownership. Some good drivers would be protected from being non renewed – but only until 2010. Further, since every state with an assigned risk plan allows insurers to charge higher rates to assigned drivers and since those states do not “fix and establish” auto rates as we do, this plan will likely result in the largest residual market in the nation and in renewed attempts at charging higher rates to drivers in our residual market regardless of their driving records.

In addition, the Governor’s “study group” on auto insurance which issued a report on March 15, 2007, of which I was a participant, recommended that the assigned risk plan not be adopted until further review and evaluation of the new CAR rules aimed at improving the system. Specifically, the commission recommended, “ the Commissioner should delay implementing any assigned risk plan until able to meaningfully evaluate the results of the 2006 redistribution of exclusive (producers) agents and subsequent revisions to the Commonwealth Automobile Reinsurers rules.”

Based on industry estimates, over a million drivers could be rejected under the proposed plan. Rejected drivers would be randomly assigned to another insurer. As a result, they would lose the freedom to choose their insurer, would be subject to discriminatory underwriting practices, and, in some instances, would face higher insurance costs.

The proposed MAIP or assigned risk plan has many negative impacts in consumers. Specifically it would:

  • Allow insurers to reject drivers based on non-driving related factors. The new plan would allow insurance companies to use most any information, including personal information – such as a driver’s credit score, income, education, and home ownership status (i.e., whether the driver doesn’t own a home) – to reject drivers. While some drivers with a clean driving record for 3 years (“Clean in 3”) will be prohibited from being non-renewed – that protection vanishes in 2010. Further, the Clean and 3 protection is only granted to those drivers who stay with their current insurer. So, a good driver who meets the “clean in 3” definition next year could be rejected by their insurer and placed in the MAIP if the consumer chooses to switch insurance companies. In any given year twenty-five percent (1 million) or more of all Massachusetts drivers could be rejected and placed in the MAIP.
  • Result in higher insurance premiums for many rejected drivers. Hundreds of thousands of drivers forced into the MAIP could pay higher premiums as a result of losing access to discounts (such as good driver discounts and combined auto/homeowners insurance discounts) when assigned to an insurer not offering the discounts. And in any year in which the Division were to authorize competitive rating, a million or more drivers could lose access to the lowest rates in the market.
  • Limit choice. Rejected consumers would no longer have the right to choose their insurer.
  • Fail to address the #1 Consumer Complaint – high premiums. While the new plan clearly addresses the complaints of some auto insurance companies, it would do nothing to address drivers’ complaints of high premiums. The assigned risk plan does nothing to correct the main cause of our high premiums – our highest-in-the-nation accident rate. The only road to lower premiums is through cost reduction. If we pursued a comprehensive cost containment effort that improved our worst in the nation accident rate to just second worst and attacked fraud as we did in the city of Lawrence, we could cut auto insurance premiums by approximately 20%, or about $200 on average per car per year. Without dealing with the underlying costs, we will not see any overall decline in premiums, but rather a shifting of premium dollars – some people would pay more and others pay less, based on factors that make no sense to the average driver.
  • Lastly, since every state with an assigned risk plan allows insurers to charge higher rates to assigned drivers and since those states do not “fix and establish” auto rates as we do, this plan will likely result in the largest residual market in the nation and in renewed attempts at charging higher rates to drivers in our residual market regardless of their driving records.
Authors

Deirdre Cummings

Legislative Director, MASSPIRG

Deirdre runs MASSPIRG’s public health, consumer protection and tax and budget programs. Deirdre has led campaigns to improve public records law and require all state spending to be transparent and available on an easy-to-use website, close $400 million in corporate tax loopholes, protect the state’s retail sales laws to reduce overcharges and preserve price disclosures, reduce costs of health insurance and prescription drugs, and more. Deirdre also oversees a Consumer Action Center in Weymouth, Mass., which has mediated 17,000 complaints and returned $4 million to Massachusetts consumers since 1989. Deirdre currently resides in Maynard, Mass., with her family. Over the years she has visited all but one of the state's 351 towns — Gosnold.

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