Agent Leader Decries ‘Two-Tiered’ Agency System in Massachusetts Auto System

The current Massachusetts auto insurance structure encourages unequal access to the residual market, creating a “two-tiered agency system” that disadvantages voluntary agents, according to the leader of the state’s agents association.

“ERPs are growing and voluntary agents are shrinking,” Frank Mancini, president and chief executive officer of the Massachusetts Association of Insurance Agents told members of the Cape Cod chapter of the Massachusetts Association of Insurance Women last evening.

ERPs refers to exclusive representative producers, agents without voluntary market contracts for auto insurance who can only place business in Commonwealth Auto Reinsurers (CAR), the state’s residual market.

“Each agent has different access, not equal access, to the residual market,” noted Mancini. “An ERP has open access to CAR while voluntary agents have restrictions but they shouldn’t. This system encourages this,” he added.

Further, Mancini maintained that the system leads to carriers spending too much time and money on “manipulating” their books of ERP business to avoid high risk pool assessments, he said. He referred to a recent $20 million lawsuit brought by one carrier, Hanover, against another, Arbella, for allegedly masterminding a scheme which let Arbella escape assessments for thousands of high risk policies and left Hanover picking up the tab.

Mancini used the opportunity to explain why his 1,700-member association is backing major changes to the way CAR provides access to agents and assesses its losses against insurers. These reforms, which would transform the residual market into more of an assigned risk type plan, are currently winding their way through the administrative system for possible implementation by Jan. 1, 2005.

One goal of the reforms is to have residual market losses assigned to insurers based on their market share, as is the case in most other states. “The purpose here is to end an imbalance that is now the number one reason companies say they won’t commit capital to Massachusetts,” Mancini explained.

Agents’ options for placing auto risks are limited. Only 19 insurers are currently licensed to write private passenger auto in the state and only a few of these are active and control the majority of the market.

At the same time as he called for more option for agents, Mancini cautioned agents against expecting a rush of insurers willing to enter the state once the CAR rules are changed. He said the state still retains major barriers to entry in its rate setting procedure along with its “take-all-comers” and mandatory offer laws. These restrictions will still probably discourage players like State Farm and Nationwide “but maybe a large independent agency company will come and maybe the ones that are here will stay” if CAR is changed, he added. Massachusetts, he stressed, “is an independent agency state,” with independent agents controlling 75 to 80 percent of the private passenger auto market.

Mancini’s call to more equally distribute the residual market burden among carriers prompted one agent to urge MAIA to also lobby to change the auto commission structure so that it is more equitable. The Cape Cod agent noted that she has to write three policies for every one that an agent in a Boston suburb writes to obtain the same commission dollars. She urged a flat fee or minimum commission amount for all agents statewide.