How Healthy is the Mass. Auto Market’

In a state where independent agents write 80 percent of private passenger auto insurance, agents are worried about attracting more capital.

While thinking about this question, consider the following facts: only 19 companies write private passenger auto insurance in the state; capital commitment to private passenger auto insurance is thin, with little hope of significant new capital to be invested in the line; the burden of the residual market is inequitably distributed among companies; there exists a two-tier agency system, which does not provide equal access for all agencies to the residual market; the structure of the residual market encourages the growth of involuntary agencies, limits the appointment of voluntary agencies and fosters manipulation of agencies between companies and other agencies.

In deciding to support the proposed Massachusetts Automobile Insurance Plan (MAIP) to reform the state’s private passenger automobile insurance residual market, the Massachusetts Association of Insurance Agents (MAIA) considered each of these facts and came to the conclusion that this marketplace is not healthy. And with independent insurance agents writing 80 percent of the state’s private passenger auto insurance, an unhealthy system, if not addressed, could prove problematic for our member agencies.

The MAIP is designed to be an assigned risk plan (rather than an assigned producer plan as the state now has) that will involve the random assignment of residual market risks to insurers. The MAIP will be introduced in two stages. The first stage will become operative on Jan. 1, 2005, and run through Dec. 31, 2007. This three-year transition is designed to limit market disruption and allow for the conversion of many involuntary agents (Exclusive Representative Producers – ERPs) to voluntary agencies. The second stage will begin operations on Jan. 1, 2008, for all residual market business.

In 1989 there were 61 companies writing private passenger automobile insurance in the state. Two-thirds of those companies have left the state over the last 15 years, leaving only 19 companies today. There is a high concentration of business in a limited number of companies with the top three writing 50 percent of the market and the top 10 writing 90 percent of the market. While there are many reasons the Massachusetts market is not attractive to insurers (state-set rates, take-all-comers, mandatory offer, to name a few) the structure of the residual market is cited as the most significant roadblock to market entry and the most common reason for exit.

With the limited number of companies in the marketplace comes a limited amount of capital committed to private passenger auto insurance. Each time a company makes the decision to abandon this market, it puts pressure on the remaining capital in the marketplace. If a significant writer of auto insurance decided to exit Massachusetts tomorrow, would there be sufficient capital to keep the system stable? A number of companies writing auto insurance in Massachusetts write business in many other states and have numerous options for where to invest their capital. Massachusetts is not likely to be high on their lists.

Companies, regulators and government officials have cited the inequitable distribution of residual market risks and losses as a key component of this marketplace’s unhealthy condition. We must move to a system that will equally distribute residual market risks based on voluntary market share. This will allow companies to better manage their business and more accurately predict their results.

A reform of the residual market structure would be a modest step in an effort to keep the remaining companies in the marketplace, encourage them to commit additional capital for growth and allow them to better manage their business.

A residual market for any line of insurance should provide for equal access for all agencies. Massachusetts’ private passenger auto insurance residual market does not provide such equal access. ERPs have open access to the residual market, while voluntary agencies are restricted from writing risks, either in the voluntary or residual market, that are above arbitrary step levels, forcing that business “out the door.” The MAIP will provide for equal access for all agencies to the residual market and will encourage appointment of ERPs to voluntary contracts.

Companies spend too much time, energy and money on ERP manipulation (buying, selling ERPs, maneuvering to avoid assignment of high loss ratio ERPs, etc.). Throughout the state ERPs can be found in the lowest rated territories with loss ratios and ceded business at voluntary agency levels. These ERPs are more valuable to companies as ERPs than they would be as voluntary agencies. They are held “captive” as ERPs, unable to secure voluntary contracts because it would adversely impact the carrier’s subscription level. The residual market must be restructured to eliminate the ERP manipulation focus and allow companies to do what they should be doing – strengthening their market position through their voluntary agencies, appointing ERPs to voluntary contracts, settling claims fairly and fighting fraud.

The adoption and implementation of the MAIP will represent an important step in achieving stability in the Massachusetts private passenger auto insurance marketplace. Such stability will forestall the potential of a market “crisis” and the threat to the independent insurance agent’s position in the marketplace.

Francis A. Mancini, Esq., is president and chief executive officer of the Massachusetts Association of Insurance Agents, based in Framingham, Mass. Contact him at fmancini@massagent.com.