Average Rate Cut Slightly, Inexperienced Drivers to Pay More, Under 2005 Mass. Auto Insurance Decision

December 17, 2004

Massachusetts Insurance Commissioner Julianne M. Bowler issued a decision in the 2005 private passenger insurance rate case that will result in a statewide average rate decrease of 1.69 percent next year. The new rate takes effective January 1 and results in an average decrease of $18.30 per vehicle and a statewide average annual rate of $1,063.19.

In her decision, she began reducing the subsidy experienced drivers now pay for inexperienced d rivers, as she noted that claims frequency among inexperienced driver classes has grown dramatically.

“With this decision, rates for inexperienced and bad drivers will be more reflective of the losses they cause and a financial incentive will finally exist for improving driving habits. It is unfair for experienced drivers to continue to shoulder the costs borne by those who cause accidents more frequently,” stated Bowler.

A report issued to the Division of Insurance in April by Tillinghast-Towers Perrin found that subsidization by driver class is unique to Massachusetts and that inexperienced drivers are charged premiums that are often significantly lower than the costs associated with providing them coverage. Massachusetts-specific data indicates that inexperienced drivers property damage and collision claims frequency is four times higher than experienced drivers and personal injury claims frequency is six times higher than that of experienced or Class 10 drivers.

In addition to a rating differential that currently exists for inexperienced drivers who have passed a Registry of Motor Vehicles-approved driver education course, Bowler approved the creation of a 5 percent discount for drivers who complete a RMV-approved advanced driver training course.

Bowler had been given three competing recommendations for overall rates. The attorney general’s office had recommended that overall private passenger auto rates be reduced by 6.2 percent, while the State Rating Bureau (SRB), the consumer arm of the Division of Insurance, had urged that rates go up just slightly, an average of one percent. These contrast with the request for a 9.2 percent increase that was filed by the industry’s Automobile Insurers Bureau (AIB). The AIB had originally asked for an average increase of 5.8 percent for insurers but revised that figure to reflect the request by agents for a 32 percent jump in average commission.

Bowler again adopted an internal rate of return model for calculating insurer underwriting profits, the use of which was upheld last month by the Massachusetts Supreme Judicial Court. The resulting profit allowance for the industry remains virtually unchanged from the 2004 rate decision.

A 4.8 percent average increase in agent commissions was approved, raising the average commission per vehicle from $114.00 in 2004 to $119.50 for 2005.

In a separate decision agreed to by the parties and affirmed by the Commissioner in November, drivers at Safe Driver Insurance Plan (“SDIP”) steps 20 to 35 will receive an increase in the value of a surcharge. The additional revenue generated from that increase will result in a reduction in the value of surcharges applied to experienced drivers with one at-fault accident or moving violation that is greater than three years old. The parties also agreed to phase-out the so-called “clean slate rule” that provides for placing drivers with SDIP steps over 15 at Step 14 with three consecutive years of at-fault accident or violation-free driving.

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